Traders increase their bets: expecting the Fed to initiate a significant 50 basis point rate cut before the end of the year.

[Traders Increase Bets: Fed Expected to Initiate a Significant 50 Basis Point Rate Cut Before Year-End] Bond traders are ramping up options bets, anticipating that the Fed will implement at least one 50 basis point rate cut in the remaining three policy meetings of the year. Market forecasters expect officials to implement the first interest rate cut for 2025 on Wednesday, with a 25 basis point reduction seen as the most likely outcome. However, despite persistent inflation, the cooling labor market is prompting some traders to hedge against the risk of a more aggressive rate cut in the coming months due to a deteriorating economic outlook. This week's trading flows related to the Secured Overnight Financing Rate (SOFR) indicate that demand for December Options contracts is rising—these contracts will expire two days after the Fed's policy statement on December 10. SOFR is highly sensitive to Fed policy expectations. These positions will profit when the Fed implements two 50 basis point rate cuts or three 25 basis point cuts during its meetings in September, October, and December. These trades reflect a more dovish path than the current pricing of swap contracts—swap contracts expect a cumulative rate cut of about 70 basis points by the December meeting.