Market Fed forecast

Despite Fed Chair Jerome Powell’s message that “interest rates will fall later than expected,” market players have begun to position themselves in SOFR futures in anticipation of aggressive monetary easing this year. Following the surprise increase in inflation indicators in the US this week, Fed Chair Jerome Powell made a change of rhetoric, signaling that it will take longer than expected to cut interest rates. With these statements, the general view on Wall Street is that interest rates will remain high for a long time, but investors in interest rate futures markets have begun to turn to a position that will profit if the Fed implements aggressive monetary easing this year. The movement is experienced in the Secured Overnight Financing Rate (SOFR) futures, which closely monitor the Fed’s interest rate. Market players are buying the December 2024 contract and selling the December 2025 contract. This futures position, which broke a trading volume record on Tuesday, gained even more momentum on Wednesday. The SOFR December 2024 and SOFR December 2025 yield spread increased on Tuesday, exceeding the 200-day moving average for the first time in 10 months. The underlying expectation behind these positions is the scenario of the Fed implementing front-loaded rate cuts ahead of the November presidential election and cutting rates by more than the total of 40 basis points priced into the market for this year. Meanwhile, Fed member Loretta Mester said that the strong US economy and robust labor market gave the Fed the opportunity to be patient and that the Fed should not rush to cut rates; while Michelle Bowman stated that the progress in inflation may have stopped.