Bond traders boost 2026 Fed cut bets to 76 bp amid Trump's Powell criticism and leadership speculation

Bond traders are increasing their expectations for aggressive Federal Reserve rate cuts in 2026, with speculation about a potential leadership change at the central bank driving market positioning. The yield spread between SOFR futures maturing in December 2025 and December 2026 reflects this shift, pricing in 76 basis points of rate cuts next year—up sharply from just 25 basis points priced in April 2025[1]. This surge in expectations follows escalating public criticism of Fed Chair Jerome Powell by President Donald Trump and growing political pressure for a more dovish monetary policy.

The shift in market sentiment accelerated after Trump intensified his attacks on Powell, framing the Fed’s current stance as overly restrictive for economic growth. House Speaker Mike Johnson, echoing similar frustrations, described himself as “disenchedanted” with Powell but remained unclear on the legal authority to remove him from office[1]. Treasury Secretary Scott Bessent, meanwhile, emphasized there is “no rush” to name a successor to Powell, though he acknowledged a pool of potential candidates from within the Fed’s existing ranks[1].

The prospect of a new Fed Chair under a Trump administration has amplified traders’ bets on policy easing. A leadership transition could signal a departure from the Fed’s recent hawkish posture, aligning more closely with Trump’s advocacy for lower rates to stimulate economic activity. Analysts note that the current trajectory of market pricing assumes a more accommodative regime, with implications for financial markets and asset valuations.

Political dynamics remain a critical wildcard. Trump’s demands for rate cuts and his broader economic agenda—evidenced by recent trade agreements with Japan and ongoing negotiations with the EU—have bolstered expectations of structural changes to U.S. monetary policy. The recent U.S.-Japan deal, which reduced tariffs on Japanese imports and included a $550 billion investment fund into the U.S., further eased trade-related uncertainties, shifting investor focus toward the Fed’s policy path[1].

While the Fed has maintained a data-dependent approach, the divergence between market expectations and official projections highlights the influence of political narratives. Powell’s term as Fed Chair expires in early 2026, with confirmation hearings for a successor likely to unfold in late 2025. Bessent’s comments that candidates could emerge from current Fed board members or regional bank leaders suggest a potential alignment between the Trump administration’s priorities and the Fed’s future direction[1].

The implications for financial markets are significant. A more dovish Fed could spur risk-on sentiment, lifting equity and real-estate valuations while pushing yields lower. However, the central bank’s credibility in balancing inflation and growth will remain under scrutiny, particularly if rate cuts accelerate ahead of a clear economic slowdown.

The market’s positioning underscores a broader theme: the interplay between political leadership and monetary policy is reshaping expectations for 2026. As the 2024 election cycle intensifies and Trump’s influence on economic rhetoric grows, the Fed’s independence faces heightened questions. Whether this translates into concrete policy shifts will depend on the next chair’s mandate, the resilience of the U.S. economy, and the broader geopolitical landscape.

Source:

[1] Bloomberg, “Bond Traders Step Up 2026 Fed Cut Bets After Trump Bashes Powell,” July 23, 2025.

[2] Mitrade, “Traders are Ramping Up Bets on Fed Rate Cuts in 2025–2026, Expecting a New Fed Chair,” July 20, 2025.