What’s next for the Fed?

Unpacking Rate Cuts, Debt Risks, and Market Signals

Doug Crescenzi

15 Jul 2025 — 5 min read

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TL;DR:

The Federal Reserve’s 2025 rate cut outlook remains cautious, with markets anticipating 1 to 2 cuts amid tariff and inflation uncertainties.
US debt default risk stays low (4% on Polymarket, 3% on Kalshi), but a downgrade chance hits 12%, signaling fiscal strain.
Jerome Powell faces 16% removal odds by Trump and 19% chance he will be out this year, with Kevin Warsh leading successor odds at 37% on Kalshi.
Kalshi markets track US debt-to-GDP thresholds (>130%, 140%, 150% before 2026), with long-tail volumes ($17,073-$21,839) reflecting investor focus on the growing national debt.
Rising US debt, projected to exceed $38 trillion with a 87% probability, could drive higher interest rates and inflation risks for investors.

Market Snapshots

Event Breakdown

What’s next for the Fed in 2025: The Federal Reserve’s policy trajectory in 2025 remains a critical focal point as economic indicators shift and political pressures mount, particularly with President Trump’s tariff policies and fiscal agenda in play. Markets are digesting a complex landscape where the Fed’s next moves could ripple across global economies. Prediction markets like Polymarket, Kalshi, and Limitless offer a window into these dynamics, with probabilities suggesting one or two rate cuts anticipated by year-end.

This range reflects a cautious stance, driven by uncertainty over inflation risks tied to tariffs and the labor market’s resilience. The likelihood of an emergency rate cut, a rare move tracked by both Polymarket and Limitless, stands at 10%, underscoring heightened volatility fears amid trade policy shifts.

Real-world implications are stark. Should the Fed opt for cuts, borrowing costs could ease for businesses and consumers, potentially spurring investment but risking inflation if tariffs push prices higher—a scenario Fed Chair Jerome Powell has flagged as a growing concern. Conversely, delaying cuts could strengthen the dollar, benefiting exporters but straining debt-laden sectors like housing, where high interest rates already bite. Markets are pricing in this tension, with traders betting on a wait-and-see approach, as Powell’s comments suggest the Fed is monitoring data closely rather than reacting preemptively. This hesitation is meaningful: it signals a pivot from the rapid cuts of late 2024, reflecting a strategic recalibration to balance inflation and employment goals amid Trump’s unpredictable policy swings.

US debt dynamics add another layer. The chance of a default by December 31, per Polymarket and Kalshi, hovers at 4% and 3%, respectively, while a debt downgrade in 2025 carries a 12% probability on Polymarket. The national debt surpassing $38 trillion, as tracked by Polymarket, sits at 87%.

These figures matter because a downgrade or default could spike borrowing costs for the government, amplifying the national debt burden—already a hot-button issue as Trump pushes for rate cuts to reduce interest payments. The real-world impact could hit taxpayers and retirees hardest, with higher yields on Treasury bonds squeezing budgets and pension funds.

Powell’s tenure itself is under scrutiny. Polymarket pegs a 17% chance of Trump removing him before 2026, while Kalshi estimates a 19% chance Powell is no longer Fed Chair before 2026.

This uncertainty fuels market jitters, as a leadership change could shift monetary policy priorities. Recent headlines point to Powell’s defiance against political pressure, vowing to base decisions on economics, not politics—a stance tested by Trump’s public criticism. If Powell exits, candidates like Kevin Hassett, Kevin Warsh, Scott Bessent, and Christopher Waller emerge, with Kevin Warsh leading at 37% on Kalshi. A new chair aligned with Trump’s views could prioritize lower rates, potentially igniting inflation but easing debt servicing costs—an outcome markets are already pricing into futures.

These movements are meaningful because they reflect not just economic data but also political will and public sentiment. The Fed’s independence, a cornerstone of its credibility, is at stake, with implications for global trust in US financial stability. For readers, this means watching how tariff outcomes and Powell’s fate interplay with rate decisions—factors that could dictate whether 2025 sees growth or stagnation. As data evolves, updating these probabilities will be key to staying ahead of the curve.

Related markets & forecasts:

Long-Tail Radar

The Kalshi prediction markets tracking US debt as a percentage of GDP before 2026 offer a compelling glimpse into long-tail risks that could reshape economic landscapes. With markets like "US debt >130% of GDP before 2026?" ($17,073 volume), "US debt >140% of GDP before 2026?" ($21,839 volume), and "US debt >150% of GDP before 2026?" ($7,684 volume), these platforms highlight investor fascination with debt scenarios. These markets are intriguing because they capture speculative sentiment around a rising debt-to-GDP ratio—projected by the CBO to hit 116% by 2034 and potentially climb higher—driven by persistent deficits, aging demographics, and rising interest costs.

What makes these markets stand out is their focus on thresholds that signal fiscal stress, such as 130% or 150% of GDP, far beyond current levels. Though low-volume and volatile, the markets reflect growing unease about policy responses to Trump’s tariff plans and spending priorities. The varying volumes—peaking at $21,839 for the 140% threshold—indicate where traders see the most uncertainty, offering a barometer for potential tipping points. For investors, these markets are a hedge against tail risks like inflation spikes or credit rating downgrades, which could erode the dollar’s safe-haven status. They also underscore long-term structural challenges, like healthcare and defense spending, aligning with our desire to spotlight under-the-radar trends. Watching these markets evolve could reveal early signals of fiscal policy shifts, making them a valuable radar for navigating 2025’s economic uncertainties.

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