It’s a bold, reckless wager, but a faction of bond market traders seems to believe that the Federal Reserve’s next rate decision might defy the consensus. Yes, you read that right—a hike, not a cut. This contrarian stance surfaced following a blowout jobs report earlier this month, casting doubt on Wall Street’s confident predictions of rate reductions in 2025.

There’s now a 25% chance that the Fed could actually increase rates by the end of the year. This probability peaked at 30% before inflation data came out, showing a relatively tame scenario that pushed Treasury yields back down from multi-year highs. Just weeks ago, the idea of a hike was laughable—60% of investors were betting on at least one rate cut, with the remainder expecting a pause. How quickly things change.

At the heart of this sudden shift lies a wildcard: the economic chaos potentially unleashed by President Trump’s impending administration. Tariffs, immigration restrictions, and other headline-grabbing policies are anticipated to spur inflation, potentially forcing the Fed into a public policy reversal as awkward as it would be abrupt.

The markets, however, aren’t buying it. Most investors are still pricing in at least one rate cut for the year, with a 50% chance of a second. Fed Governor Christopher Waller even hinted recently that rates could drop again in the first half of 2025 if inflation data continues to behave. Yet, Vanguard’s global head of rates, Roger Hallam, isn’t ruling out a hike, warning that any unexpected inflationary surprises in the coming months could tilt the scales.

Jerome Powell, the Fed chair, has left the door ajar for just such a scenario. At December’s press conference, he didn’t rule out a hike entirely but did say it was “not the likely outcome.” Still, history has shown the Fed is capable of sharp pivots. A Case in point is the late 1990s when it reversed three rate cuts with hikes to stave off inflationary pressures.
The real hurdle for any hawkish turn? For now, the Fed seems content to wait on the sidelines, watching closely as Trump-era policies take hold.

One thing is clear: as investors hedge their bets on hikes, cuts, or a continued pause, the market will remain on edge. Whether this contrarian gamble pays off or ends in tears, 2025 will be anything but predictable.