(Bloomberg) — Traders are betting on a slower pace of interest-rate cuts from the Federal Reserve this year, with economic resilience forcing policymakers to remain on hold for longer before easing more sharply in 2026.
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Just a day ahead of the US central bank’s latest policy decision, money markets are pricing three quarter-point reductions this year, one less than at the start of April. About a half point of additional cuts are expected next year, the most priced in for 2026 at any point in the current easing cycle.
Traders will be scrutinizing comments by Fed Chair Jerome Powell on Wednesday — when the central bank is expected to keep its benchmark rate steady at 4.25%-4.50% — for clues on whether President Donald Trump’s economic policies are prompting any change in policymakers’ view on the timing for further rate cuts. Prior to the customary, pre-decision blackout period, officials urged patience, particularly with higher US tariffs set to fan near-term inflationary pressures.
Market expectations for a cut at the June policy meeting have also faded since Friday, when employment data came in stronger than economists predicted. Monday’s April ISM services data also hinted at economic strength, adding to pressures for front-end yields which are particularly sensitive to monetary policy.
“Unless something bad happens between now and June, it means the Fed doesn’t need to go,” said Kevin Flanagan, head of fixed income strategy at Wisdom Tree. Short-term yields are vulnerable given that the Fed in March had forecast two rate reductions this year, he added.
Traders are also positioning for later rate cuts in options markets. For example, the maturity date of one particular position hedging against deep cuts was just extended for the second time in a couple weeks.
Open interest data from the CME showed a considerable amount of de-leveraging and position unwinds in the front end of the curve after the April payrolls, consistent with liquidation of long positions.
In the cash market, conviction remains light as investors grapple with Trump’s trade policies and their potential impact on central bank policy. Tuesday’s JPMorgan Treasury client survey showed neutral positions remain elevated and close to yearly highs.
Here’s a rundown of the latest positioning indicators across the rates market:
