Traders Boost Bets on Just One 2025 Fed Cut Ahead of CPI Data

Traders are increasingly betting on fewer Federal Reserve interest rate cuts this year, pricing in only about 0.45 percentage points of easing by year-end, the smallest since before President Trump's tariffs in early April, as resilient growth and sticky inflation persist. This shift is driven by stronger-than-expected jobs data and cooling trade tensions, leading to increased hedging activity in SOFR options targeting minimal or no Fed policy moves this year, with notable demand for hawkish protection extending into early 2026. JPMorgan's Treasury client survey also indicated investors' net long positions rose to the largest since May 5.

Analysis

Market participants are significantly recalibrating expectations for Federal Reserve monetary policy, now pricing in only approximately 0.45 percentage points of interest rate cuts by year-end, a stark reduction from earlier projections which, at one point, anticipated as much as a full percentage point of easing by the end of 2025. This shift reflects growing evidence of resilient U.S. economic growth, persistent inflationary pressures, and stronger-than-forecast May jobs data. The upcoming May consumer-price index data is anticipated to show an uptick, potentially reinforcing the Federal Reserve's cautious, data-dependent stance and supporting the widespread expectation that rates will remain unchanged at the next policy meeting. Further contributing to this revised outlook are indications of cooling U.S.-China trade tensions. Derivative markets, particularly options linked to the Secured Overnight Financing Rate (SOFR), reveal a notable increase in hedging activity, with significant demand for hawkish protection structures targeting limited or even no Fed rate cuts this year and extending into early 2026. For instance, Tuesday's open interest showed new positions reflecting this sentiment, including heavy buying in SOFR Dec25 95.625/95.375 put spreads and activity in the 95.8125 strike via put flys, which gain value as rate-cut expectations diminish. Concurrently, the JPMorgan Chase & Co. Treasury client survey from June 9 indicated that investors' net long positions in Treasuries rose to their highest level since May 5, with shorts decreasing by 2 percentage points.

Key Decisions for Investors

• Investors should re-evaluate exposures sensitive to interest rate fluctuations, as the market is now pricing in significantly fewer Fed rate cuts for the remainder of the year.
• Monitor the upcoming May U.S. consumer-price data closely, as it will be a key determinant for the Federal Reserve's near-term policy trajectory and could further solidify the current hawkish repricing.
• Consider adjusting portfolio allocations to reflect the diminished likelihood of aggressive monetary easing, potentially by reducing overweight positions in assets that benefit most from falling rates or increasing hedges against sustained higher rates.
• Pay attention to shifts in SOFR options positioning and Treasury client surveys for ongoing insights into institutional sentiment regarding the Fed's policy path.