Interest rate traders are increasing their bets on a 50 basis point rate cut at least once in the Federal Reserve’s three remaining policy meetings this year. Some are even betting on a Fed rate cut tonight…
Federal Reserve policymakers are expected to announce their first rate cut since 2025 at 2:00 a.m. Beijing time on Thursday, with the market generally believing a 25 basis point cut is the most likely scenario…
However, despite persistent US inflation, signs of a cooling labor market are prompting some traders to hedge against the risk of a larger rate cut due to a deteriorating economic outlook.
In the Chicago Mercantile Exchange’s federal funds futures market, a “secret trader” is reportedly wary of a possible dovish surprise at this week’s Fed meeting. Researcher Ed Bolingbrook identified the largest-ever federal funds futures block trade at the front end of the curve on Monday…
The trade involved 84,000 October federal funds futures contracts, representing $3.5 million in exposure per basis point. The price and timing of the block trade were consistent with the buyer’s profile. Given that the swaps market has fully priced in a 25 basis point rate cut from the Fed, this move may indicate that the mysterious trader is hedging against a 50 basis point rate cut on Wednesday.
The Chicago Mercantile Exchange confirmed on Tuesday that this was the largest block trade in the history of federal funds futures…
Federal funds futures contracts, officially traded on the Chicago Board of Trade in 1988, are a key market indicator of the Fed’s overnight benchmark interest rate.
In addition to CME futures contracts, trading flows related to the overnight secured financing rate (SOFR) this week also showed increased demand for December options contracts. These options expire within two days of the Fed’s final rate decision for the year on December 10.
These contracts are reportedly poised to profit if the Fed implements two 50 basis point rate cuts, or three consecutive 25 basis point cuts, in its final three meetings of the year (September, October, and December). These trading strategies reflect a more dovish interest rate path than currently implied by swap market pricing, with the Fed currently projecting a cumulative rate cut of approximately 70 basis points by the December meeting.
In fact, while the industry generally considers a 50 basis point rate cut from the Fed tonight to be extremely unlikely, some investment banks are speculating on its possibility.
In a recent report, Standard Chartered Bank economists suggested that given weak job growth, the Fed could implement a 50 basis point “catch-up” rate cut this week. However, they also stated that Powell is unlikely to proactively reveal plans for further easing as officials remain divided over the next steps.
Traders implicitly betting on an extremely dovish Fed stance are likely also factoring in pressure from the White House.
US President Trump has repeatedly criticized Powell for his slow pace of rate cuts. This week’s meeting will feature the first appearance of newly appointed Fed Governor and Chairman of the White House Council of Economic Advisers, Michael Milan, who will be attending the Fed meeting. This is likely to trigger a fierce battle between different factions within the Fed.
