Traders Bet on 25% Rate Cut Post-Powell as Fed Futures Surge

Rate traders in the United States are making unprecedented bets that the Federal Reserve will swiftly adopt a more dovish stance following the conclusion of Chairman Jerome Powell's term in May 2026. This type of trading reached a record volume on Monday and continued to expand on Tuesday. The shift in expectations comes as traders anticipate a change in the Fed's monetary policy direction post-Powell. The record-breaking activity in rate trading suggests a significant market sentiment that the Fed will pivot towards a more accommodative policy stance once Powell's tenure ends. This development underscores the market's anticipation of a potential shift in the Fed's approach to interest rates and economic management, reflecting a growing belief that the central bank may ease its monetary policy in the future. The increased trading volume indicates a heightened level of market activity and speculation surrounding the Fed's future policy decisions, with traders positioning themselves accordingly. The market's focus on Powell's term end date highlights the influence of leadership changes on monetary policy expectations and the broader economic outlook.

Traders are betting that whoever is appointed by the President to succeed Powell will lead the Federal Reserve to almost immediately lower interest rates. The first Federal Open Market Committee meeting under the new chair will be held in June 2026. Over the past few months, the President has been pressuring Powell to reduce borrowing costs, despite the Fed officials indicating that they plan to remain on hold for the time being and closely monitor the impact of the President's tariff policies on the economy and inflation. Market expectations are that the Fed will keep interest rates unchanged on Wednesday, and given the potential for tariffs to push up the Consumer Price Index, Fed officials may lower their forecasts for rate cuts this year in the dot plot.

These bets are accumulating in markets related to the Secured Overnight Financing Rate (SOFR), with futures contracts closely tracking the Fed's interest rate policy outlook. Since the President indicated that he would "soon" nominate Powell's successor, this betting trend has intensified. Data shows that these rate futures bets involve selling SOFR contracts expiring in March 2026 and buying those expiring in June 2026—a three-month spread trade that is causing confusion in futures contracts covering the first half of next year.

Heavy selling of the March contract has caused its price to fall sharply relative to other expiration dates, particularly compared to contracts expiring in December 2025 and June 2026. As a result, the relative price spread around the March 2026 futures has surged to its highest level since January. The trading volume of these futures positions reached a record 108,649 contracts on Monday, equivalent to approximately 27 million dollars of risk per basis point. The open interest in March 2026 and June 2026 futures has reached the highest level of the current policy cycle, partly due to the demand for this trade. Most of these contracts are traded anonymously, making it difficult to identify the participating institutions and the specifics of the trades.

Will the next Fed chair adopt a dovish stance? Steven Barrow, G-10 strategy head at a major bank, noted in a report that the President might choose a successor who is clearly more inclined towards an accommodative monetary policy, although this could make it more difficult for the nominee to be confirmed by Congress. Economists, including Will Denyer, have highlighted the potential risks of this shift. Denyer pointed out that an early nomination by the President could lead investors to focus on the statements of the "shadow" Fed chair and Powell's signals for nearly a year. Denyer stated, "This discordant voice could once again undermine market confidence in U.S. policy-making." It is important to note that monetary policy is set by the Federal Open Market Committee, composed of Fed officials, and the chair cannot unilaterally set the policy rate.

The Federal Reserve is scheduled to announce its June rate decision at 2:00 AM Beijing time on Thursday. The market's primary focus is on the Fed officials' dot plot forecasts, with the latest projections expected to show only one 25 basis point rate cut in 2025. In the previous economic projections released in March, the median forecast was for two 25 basis point rate cuts by the end of the year. On the rate market side, traders have priced in about 43 basis points of rate cuts by the Federal Open Market Committee by the end of the year, with the first cut potentially occurring as early as September. Notably, current market expectations suggest that the Fed's rate cuts from now until the end of 2026 could exceed those of any other G10 central bank, potentially further exacerbating downward pressure on the dollar.