Over 23% of Traders Now Expect Interest Rate Cut at Next FOMC Meeting

The number of traders expecting a rate cut at the March 2026 Federal Open Market Committee (FOMC) meeting has risen to 23%, according to data from the Chicago Mercantile Exchange (CME) Group. This reflects growing concerns among investors about the potential hawkish stance of the newly nominated Federal Reserve chair, Kevin Warsh.

The rise in expectations is a 4.6 percentage point increase from the previous reading of 18.4% reported just days earlier. Most of those anticipating a rate cut project a 25 basis point (BPS) reduction, with no traders expecting a 50 BPS or larger cut. This shift in market sentiment is attributed to fears that the Fed, under Warsh, may adopt a tighter monetary policy than expected.

Treasury yields have responded to the uncertainty surrounding the nomination of Kevin Warsh. Yields across the curve have fallen in early trading, with the two-year Treasury yield down 1.3 basis points and the 10-year yield declining by 2.5 basis points.

Why Did This Happen?

The nomination of Kevin Warsh has created uncertainty in financial markets. Although President Trump has stated that he chose Warsh to lower interest rates, the market is interpreting Warsh's views on the Fed's balance sheet as a signal of tighter monetary policy. Some analysts suggest that Warsh's comments about the balance sheet being "trillions larger than it needs to be" have fueled fears of a lower-liquidity environment.

Warsh's nomination has also led to a shift in investor behavior. Precious metals have declined sharply, and risk sentiment has weakened. This suggests that investors are preparing for a more hawkish Fed stance, which could mean fewer rate cuts in the near term.

How Did Markets React?

The decline in Treasury yields is one of the more immediate responses to the nomination of Kevin Warsh. Yields have fallen as investors recalibrate expectations about future rate cuts and the Fed's monetary policy approach. The yield on the 10-year Treasury reached 4.215%, according to Tradeweb.

Market participants are also closely watching how the Fed's balance sheet strategy might evolve under Warsh's leadership. If the Fed moves to shrink its balance sheet, this could reduce liquidity in financial markets. That, in turn, could lead to higher borrowing costs and tighter credit conditions.

What Are Analysts Watching Next?

Analysts are monitoring how the FOMC will respond to economic data in the coming months. The March 2026 meeting is now the next key decision point. Given the current uncertainty, a 25 BPS rate cut remains the most likely scenario, but market participants are watching for signs of divergence within the FOMC.

The nomination of Kevin Warsh has also introduced uncertainty about the broader direction of U.S. monetary policy. The Shiller P/E ratio for the S&P 500 is at an historically high level, and any tightening of liquidity could have significant implications for equity markets.

Investors are also evaluating the potential impact of rate cuts on asset classes such as cryptocurrencies. Easing liquidity conditions are generally seen as a positive for crypto prices, whereas tighter conditions can lead to lower valuations.

The broader implications of the Fed's balance sheet strategy remain a key area of focus. If the Fed moves to reduce its balance sheet, this could have ripple effects across multiple asset classes. Investors are weighing these possibilities as they position their portfolios for potential volatility.

Market watchers are also keeping an eye on global economic developments. For example, in Brazil, investors are anticipating rate cuts in 2026, which could lead to increased equity issuance and improved liquidity in emerging markets.

The Fed's next steps will have a direct impact on global capital flows and market sentiment. The outcome of the March FOMC meeting will be closely watched for signs of whether the Fed will adopt a more hawkish or dovish stance under Warsh's leadership.