Online Reporter
Bond traders are boosting bets that the Federal Reserve will cut interest rates more aggressively next year, as speculation mounts that an eventual change of leadership at the central bank will deliver the easier monetary policy that President Donald Trump is demanding.
Their conviction is showing up in the yield spread between Secured Overnight Financing Rate (SOFR) futures maturing in December 2025 and December 2026, which reflect expectations of how deeply the Fed will cut rates in that period.
While the gap has slowly widened over the last several months as a resilient economy prompted traders to expect the Fed to delay rate cuts toward next year, the move accelerated after Trump ramped up his broadsides against Fed chair Jerome Powell last week.
Investors are now pricing 76 basis points of cuts next year, compared to just 25 basis points priced in as recently as April.
The shift shows how traders are increasingly convinced that a successor to Powell — whose term ends in May 2026 — will fall in line with the president’s demands for lower rates. While Trump last week quickly walked back threats to fire the Fed chief after they sparked a brief spasm in markets, investors appear to have latched onto the idea that he will succeed in bending the central bank to his will.
“Whoever comes in next, that person is going to have a bias towards lowering rates,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle. In addition, “the economy is less likely to be resilient next year”, opening the door for more policy easing, he said.
Powell has been under fire from Trump and his allies for holding back on rate reductions due to concern over the inflationary impact of the administration’s tariff hikes. A number of Republicans this month have also taken issue over a costly renovation of the central bank’s buildings. — Bloomberg
Peter Tanyanyiwa