Traders are increasingly wagering on the Federal Reserve implementing at least one substantial interest-rate cut before the end of the year. This aggressive positioning suggests some market participants anticipate a more dovish monetary policy than currently projected by most analysts. The bets centre around the potential for a 0.5 percentage point reduction.
Recent options activity tied to the Secured Overnight Financing Rate (SOFR) reveals a build-up in positions anticipating a 50-basis-point rate cut either at the upcoming Federal Reserve meeting later this month or at the December meeting. This is more aggressive than the two quarter-point cuts currently priced into interest-rate swaps, indicating a divergence in expectations regarding the Fed’s future actions.
The weeks-long US government shutdown has created a backlog of critical economic data, including employment figures and other key metrics. Once resolved, the release of this pent-up data is expected to offer a clearer picture of the current economic landscape. Some anticipate this flood of information will reveal further signs of economic weakness, bolstering the case for more aggressive rate cuts by the Federal Reserve in the near term.
