The market is still betting that the Federal Reserve will cut interest rates significantly at least twice in the near future, with a total reduction of 150 basis points by the end of January next year

Traders in the U.S. interest rate options market are still betting that the Federal Reserve will cut rates significantly at least once this year—just maybe not before the U.S. presidential election on November 5. Ahead of next week's Federal Reserve FOMC policy meeting , the Fed's swaps reflect expectations of a 25 basis point rate cut, with little chance of a larger rate cut. Looking further ahead, the situation changes. Recent options activity related to secured overnight financing rates shows that traders are increasingly preparing for the Fed to cut rates by approximately 150 basis points by the policy meeting on January 29 next year. This aligns with current pricing in the swaps market. To implement such a large-scale easing policy without intermeeting rate cuts, officials would have to cut rates by at least 50 basis points in two out of the four meetings before January next year—a magnitude greater than the standard 25 basis points. Just a few weeks ago, traders were heavily betting on a rate cut of 50 basis points this month (or even earlier) due to concerns that a deterioration in the U.S. labor market would force the Fed to act quickly to address the threat of an economic downturn. Although subsequent data has somewhat alleviated these concerns, traders are still betting that the Fed may soon need to take significant action. Even a 25 basis point rate cut next week would be a milestone, marking a turning point for the Fed towards monetary easing after more than two years of restrictive rate policies. Three events this week could potentially impact the market: the U.S. vice presidential debate between Harris and former President Trump on Tuesday, as well as U.S. inflation-related data on Wednesday and Thursday. With traders solidifying expectations of an imminent Fed rate cut, U.S. Treasury prices have risen sharply, pushing yields lower. In the options market, there was a $9 million trade on Monday targeting an increase in the scale of easing by the Fed before the policy meeting in March 2025, while a $3.5 million "premium trade" was aimed at a rate cut of at least 50 basis points at the Fed's policy meetings in September or November. On another front, U.S. Treasury futures traders covered short positions following the key non-farm payroll report released last Friday, resuming bullish bets. If traders aim to lock in profits around the upcoming FOMC meeting next week, this bullish trend may see a reversal. Citigroup strategist David Bieber wrote in a report on Tuesday, "As we await the FOMC meeting, against a backdrop of cyclical strength, bulls remain vulnerable to profit-taking."