Fed Rate Cut Odds Jump to 80%: Traders Bet Big on December Move
- Market Odds Surge: Traders have drastically repriced the probability of a December Fed rate cut from 30% to roughly 80% following delayed labor data and dovish comments from key officials like John Williams.
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Wall Street has witnessed a dramatic reversal in interest rate expectations over the last week, with investors now aggressively betting that the Federal Reserve will lower borrowing costs at its upcoming December meeting.1 Just days ago, the market viewed a rate cut as unlikely, assigning it only a 30% probability. However, following a cascade of new economic data and dovish commentary from central bank officials, futures markets are now pricing in roughly an 80% chance of a quarter-point reduction. This surge in conviction has sparked a rally in US bonds and erased previous doubts about the Fed's immediate policy path.
The catalyst for this sudden shift stems from a combination of delayed jobs data and explicit signals from key Federal Reserve leadership. New York Fed President John Williams recently indicated that he sees room for a reduction in the "near term" due to softening in the labor market.2 His sentiment was echoed by San Francisco Fed President Mary Daly and Governor Stephen Miran, who have both advocated for policy adjustments despite inflation remaining stubbornly above the central bank’s 2% target. This coordinated messaging suggests that the "doves"—officials who prioritize employment over strict inflation control—now outnumber the "hawks" on the committee.
Market positioning reflects this new reality with historic intensity. Trading volumes in January fed funds futures have hit record highs, with a massive influx of new "long" positions. This bullish sentiment has spilled over into the cash Treasuries market as well. A closely watched client survey from JPMorgan revealed that net long positions have risen to their highest level since October 2010.3 This indicates that institutional investors are not just speculating on a short-term blip but are positioning their portfolios for a sustained period of easing yields.
Political developments are also influencing the bond market's trajectory. The 10-year US Treasury yield briefly dipped below 4% on Tuesday, a move driven in part by speculation that Kevin Hassett, a former White House economic adviser, is the front-runner to become the next Fed chair.4 Hassett is perceived by markets as favoring lower interest rates to stimulate growth, further fueling the expectation that monetary policy will become more accommodative in the coming year regardless of the current inflation stickiness.5
Despite the overwhelming market consensus, a divide remains between aggressive traders and cautious Wall Street strategists. While the futures market is pricing the cut as a near-certainty, major banks like Morgan Stanley have scrapped their calls for easing, and JPMorgan Chase warns that the decision remains a "very close call." Economists at PIMCO also urge caution, noting that while the economy has held up well, inflation hovers around 3%, which is significantly higher than the Fed’s target. This discrepancy suggests that while traders are betting on the Fed reacting to labor weakness, some analysts believe sticky inflation could still force a pause.
Historically, the Federal Reserve rarely surprises the market when expectations are this entrenched. It is standard practice for officials to guide Wall Street toward their intended decision to prevent volatility. With traders now fully pricing in a cut, Fed Chair Jerome Powell would likely need to intervene verbally in the coming days if he intended to hold rates steady. The fact that the market viewed Williams’ recent comments as a proxy for Powell’s own views suggests the Chairman is likely on board with the cut to support the "soft landing" narrative.
Technical indicators in the options market further corroborate this dovish outlook. There has been a surge in activity surrounding specific strike prices in SOFR (Secured Overnight Financing Rate) options that target hedging around a 25-basis-point cut. Structures such as "call spreads" and "call condors" are seeing heavy demand, reinforcing that savvy market participants are paying premiums to protect themselves against—or profit from—a rally in Treasuries.