Traders are stepping up bets: Fed is expected to launch a 50 basis point sharp rate cut by the end of the year

Bond traders are stepping up their options bets, and the Fed is expected to implement at least one 50 basis points rate cut in the remaining three policy meetings of this year. Market forecast officials will conduct their first rate cut in 2025 on Wednesday, with a 25 basis point cut seen as the most likely result. But while inflation remains sticky, the cooling of the labor market is driving some traders to hedge the risks of worsening economic outlook leading to more aggressive rate cuts in the coming months. The trading flows related to the guaranteed overnight financing rate (SOFR) this week show that demand for December option contracts is rising—which will expire two days after the Fed’s December 10 policy statement was released. SOFR is highly sensitive to Fed policy expectations. These positions will make a profit when the Fed achieved two cumulative 50 basis points cuts or three 25 basis points cuts in its September, October and December meetings. These transactions reflect a more dovish path than the current pricing of swaps, which is expected to cut interest rates by December meetings by about 70 basis points.