Bets Emerge That End To Powell’s Term Means More Fed Rate Cuts

The prospect of a shift in US monetary policy when President Donald Trump replaces Jerome Powell at the end of his term as Federal Reserve chair in May 2026 has interest-rate traders looking for pay dirt.

That was evident this week in Secured Overnight Financing Rate futures — a principal way for traders to wager on changes in the Fed’s policy rate. The combination of high-volume selling of the March 2026 contract and buying of the June 2026 contract amounts to a bet that the central bank will cut interest rates in the interim.

Volume in the spread between the two contracts exceeded 60,000 on Thursday, the second highest on record. The highest-volume day was April 9, when Trump’s decision to pause tariffs on some trading partners spurred huge moves in US financial markets. Open interest in the contracts — products of CME Group Inc. — increased, suggesting that traders set new positions in them as opposed to liquidating existing ones.

Fed policymakers have eight scheduled meetings a year to set the target band for the federal funds rate, which SOFR conforms closely to. The last one of Powell’s current term is set for April 28-29. The next one is June 16-17.

Speculation that a successor would cut interest rates immediately is rooted in Trump’s persistent scolding of Powell for not having done so already. In April, Trump said the end of Powell’s term “cannot come fast enough.”

Since then — including last week — Trump has said he won’t fire Powell. But he’s kept up pressure on the central bank to cut rates, and said he intends to name a successor soon.

Powell’s Fed raised interest rates sharply in 2022 and 2023 in response to accelerating inflation, and cut them three times toward the end of last year, before Trump was inaugurated to a second non-consecutive term in January.

Since then, policymakers — who’ve projected cutting rates further before next year — have taken the position that the 4.25%-4.5% band remains appropriate in light of employment and inflation trends.

That’s infuriated Trump, who during his first term in 2017 nominated Powell to become Fed chair the following year.

Fed policymakers have their fourth meeting of the year next week and are expected to leave rates unchanged. They also will update their economic projections for the first time since March, when their median forecast was for two quarter-point rate cuts by year-end.

Economists surveyed by Bloomberg predict quarter-point rate cuts in September and December this year.

Source: Bloomberg Europe