U.S. interest rate traders are making record bets that the Fed will quickly take a more dovish stance after Fed Chairman Powell's term ends in May 2026.
Such trading set a record volume on Monday and expanded further on Tuesday. Traders are betting that whoever Trump appoints to replace Powell will lead the Fed to cut interest rates almost immediately - the first Fed meeting under the new chairman will be held in June 2026.
Trump has been pressuring Powell to lower borrowing costs in recent months, although Fed officials have hinted that they plan to hold off for now and keep a close eye on how Trump's tariff policy will affect the economy and affect inflation. The market generally expects the Fed to keep interest rates unchanged on Wednesday, and given the risk that tariffs may push up CPI, Fed officials in the interest rate dot plot may lower their forecasts for the extent of interest rate cuts this year.
The futures bets have been piling up in markets tied to the Secured Overnight Financing Rate, or SOFR, which closely tracks the Fed’s outlook for interest rate policy. The bets have gained momentum since Trump said this month that he would nominate Powell’s successor “soon.”
The bets involve selling SOFR contracts expiring in March 2026 and buying contracts expiring in June 2026 — a three-month spread that is causing dislocations in futures contracts covering the first half of next year, data show.
The heavy selling of the March contract has caused its pricing to fall unusually sharply relative to other expirations, especially those expiring in December 2025 and June 2026. As a result, the relative spread around March 2026 futures has surged to its highest level since January.
Volume in the futures position hit a record 108,649 contracts on Monday, equivalent to about $2.7 million of risk per basis point. Open interest in March 2026 and June 2026 futures has reached its highest level in the current policy cycle, partly due to demand for the trade. Most of the contracts are traded anonymously, making it difficult to determine the institutions involved and the specific details of the transactions.
Will the next Fed chairman turn dovish?
Steven Barrow, head of G-10 strategy at Standard Chartered Bank, wrote in a report, "Trump may choose a replacement who is clearly more inclined to loose monetary policy, although this may make it more difficult for his candidate to pass the congressional approval process."
Analysts such as Will Denyer, an economist at Gavekal Research, mentioned the risks that this move may bring. Denyer pointed out that Trump's early nomination may cause investors to pay attention to the remarks of the "shadow" Fed chairman and the signals sent by Powell for nearly a year.
Denyer said, "This discordant voice may once again hit the market's confidence in US policy making."
It should be clear that monetary policy is set by the Federal Open Market Committee, which is composed of Fed officials. The chairman cannot set the policy rate unilaterally.
The Federal Reserve will announce its June interest rate decision at 2 a.m. Beijing time on Thursday. The main focus of the market is currently on the interest rate dot plot forecasts of Federal Reserve officials. It is expected that the latest forecasts of the Federal Reserve officials attending the meeting will show that there will be only one 25 basis point rate cut in 2025. In the last round of economic forecasts released in March, the median forecast was that there would be two 25 basis point rate cuts before the end of the year.
In the interest rate market, traders are pricing in about 43 basis points of interest rate cuts by the Federal Open Market Committee before the end of the year, with the first rate cut possibly landing as early as September.
It is worth mentioning that the market currently expects that the Fed's interest rate cuts from now to the end of 2026 may far exceed those of any other G10 central bank, which may further increase the downward pressure on the US dollar.
