Bond traders are increasingly betting on the Federal Reserve implementing at least one half-point interest-rate cut during the remaining three policy meetings this year. While current projections anticipate officials lowering borrowing costs on Wednesday (Thursday AEST) for the first time in 2025, with a quarter-point reduction considered the most probable, a weakening labour market is prompting some traders to hedge against the possibility of a deteriorating economic outlook leading to more substantial moves. This comes despite persistent inflation.
Recent trading activity linked to the Secured Overnight Financing Rate (SOFR) reveals heightened demand for wagers centred around December options, set to expire shortly after the Fed’s December 10 announcement. These positions are structured to benefit from scenarios involving as many as two half-point cuts, or three quarter-point adjustments, across the September, October, and December announcements.
The current trades suggest a more dovish outlook than reflected in swaps, which are currently pricing in approximately 70 basis points of easing through the December gathering. However, these wagers carry the risk that Fed Chairman Jerome Powell might signal a more cautious approach on Wednesday, particularly given the uncertain impact of tariffs on consumer prices.
Standard Chartered economists anticipate a half-point “catch-up” cut this week, citing the weakness in job growth. However, they noted that Powell is unlikely to provide clear guidance on further easing, with officials holding differing views on subsequent moves.
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