According to the Zhitong Finance APP, on the eve of the Federal Reserve's announcement of the latest monetary policy decision and Jerome Powell's policy speech, Wall Street traders are collectively reducing their bets on the number and magnitude of interest rate cuts by the Federal Reserve this year. They hope to gain clearer guidance from the upcoming updated economic forecast summary and the dot plot to cope with the increasingly complex economic and political environment in the United States under Trump's leadership.
Comprehensive betting data from the financial markets show that just a week ago, the U.S. short-term futures market reflected Wall Street traders' expectations for a nearly 75 basis point rate cut in 2025, indicating three rate cuts of 25 basis points each this year, with the first cut expected as early as June.
However, in the more than ten hours leading up to the Federal Reserve's monetary policy decision and the press conference by Chairman Powell on Wednesday local time, traders in the financial markets significantly cooled their rate cut pricing with real money. Pricing data from the swap market, U.S. Treasury trading market, and SOFR futures market show that traders are only pricing in two rate cuts, and there is a general expectation that the first rate cut this year will not occur until the second half of the year, with a cooling of bets on the second rate cut.
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock and head of the Global Allocation Investment Team, stated on Tuesday that the market's biggest concern is stagflation, with economic growth slowing while inflation remains stubbornly above the Federal Reserve's 2% target. He noted that if Powell signals a dovish stance, indicating the Fed's willingness to cut rates quickly during an economic slowdown, the market may react positively. However, the reality is that the high inflation environment puts the Fed in a difficult position. &#34;Current inflation levels are significantly above the target, making it difficult for Powell to adopt an overly dovish stance.&#34;
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Swap market rate cut expectations have significantly cooled—over the past week, the rate cut premium for the Federal Reserve by the end of next year has been greatly reduced.
Federal Reserve policymakers, including Powell, and U.S. stock investors find themselves in a tricky environment: on one hand, the U.S. economy is still in an expansion process, and although inflation is higher than the general expectations of Fed officials, it seems to be under control. On the other hand, the increasingly high inflation expectations shown by the Michigan survey still support the Fed's cautious attitude towards further rate cuts. The University of Michigan Consumer Sentiment Index has declined for three consecutive months, indicating that market confidence in the future economic outlook is weakening. More importantly, in March, consumers' long-term inflation expectations rose from 3.5% last month to 3.9%, marking the highest level since 1993.
Meanwhile, multiple economic indicators show a deterioration in U.S. consumer sentiment, with cracks in economic growth beginning to appear. After all, consumption-related statistics account for about 70% of U.S. GDP, and there are concerns that the return of President Donald Trump to the White House, with a trade policy focused on imposing tariffs, could lead to economic stagnation and a resurgence of inflation
These concerns have recently triggered a wave of selling in the U.S. stock market and other risk assets, pushing the benchmark U.S. Treasury yield to its lowest level in months. The fiscal policies of the Trump administration and planned government cuts will also have a certain degree of impact on the U.S. economy.
Compared to the &#34;Trump put option,&#34; the market is more eager for the &#34;Federal Reserve put option.&#34;
This week, the latest economic forecast data and dot plot to be released by Federal Reserve officials will provide the most specific evidence to date showing the potential impact of Trump administration policies on the U.S. economy and Federal Reserve monetary policy.
For market participants focused on the U.S. stock market, stock traders and investors are eagerly awaiting more dovish signals from the Federal Reserve's latest economic forecast and dot plot, as well as from Powell's speech to boost the U.S. stock market. In other words, compared to the strike price of the &#34;Trump put option,&#34; the market is more eager for the &#34;Federal Reserve put option&#34; to be exercised immediately.
Looking at this round of declines in the U.S. stock market, the core influencing factor is undoubtedly the global tariff war initiated by Trump, which has severely damaged the confidence index of U.S. businesses and consumers regarding inflation prospects and future economic outlooks. Coupled with the market liquidity pressure brought about by the Federal Reserve's long-term maintenance of high interest rates and the high interest rate expectations suppressing the DCF valuation model of technology stocks, it is unlikely that the U.S. stock market's technology stocks will see a so-called &#34;major reversal bull market&#34; without strong positive boosts from either Trump or the Federal Reserve.
As the widespread trade war initiated by President Trump raises concerns about &#34;stagflation&#34; in the U.S. economy or even a &#34;deep economic recession,&#34; the buying on dips in the U.S. financial market and the broader global investors' hesitation towards &#34;buying on dips&#34; in the high-valued U.S. stocks is increasing.
The series of new tariffs recently announced by Trump, who is returning to the presidency for a second term, has severely impacted the confidence index of U.S. businesses and consumers, significantly raising consumer inflation expectations and recession expectations. This has made global institutions and individual investors increasingly cautious about investing in the U.S. market. Since February, when Trump's new administration fully focused on the policy of imposing tariffs, a growing amount of global capital has fled the U.S. stock market.
Despite a significant rebound in stock prices last Friday, the Nasdaq Composite Index, which is dominated by technology stocks, still fell 2.5% last week and has retreated 11% from its historical high in February. In fact, from a weekly decline perspective, the Nasdaq has now fallen for four consecutive weeks. Apple, the largest weighted stock, recorded its largest weekly decline in two years. The benchmark U.S. stock market index—the S&amp;P 500—has also fallen 10% from its recent peak, entering what is known as the &#34;correction zone&#34; alongside the Nasdaq.
**The market had eagerly anticipated that the so-called &#34;Trump put option&#34; would significantly boost the underperforming U.S. stock market this year, but neither Trump nor U.S. Treasury Secretary Mnuchin has recently indicated any support or reassurance for the U.S. stock market. Instead, Mnuchin emphasized that as the U.S. economy moves away from dependence on government spending, it may inevitably experience a &#34;detox&#34; period. Trump himself stated that the U.S. economy will have a &#34;transition period,&#34; with tariffs inevitably causing &#34;disturbances,&#34; emphasizing that tariffs are meant to make America prosperous again and to &#34;Make America Great Again.&#34;
Another major Wall Street firm, Morgan Stanley, recently stated that without positive catalysts from Trump or the Federal Reserve, a reversal in the U.S. stock market is unlikely. Morgan Stanley's Chief U.S. Equity Strategist Mike Wilson recently wrote that the tradable rebound in U.S. stocks that started last Friday has begun, and the market adjustment may have come to an end, but this rebound is more likely to be just a tradable bounce rather than a sustained bull market.
Wilson, who accurately predicted the sharp decline in U.S. stocks in 2022, stated that unless a &#34;Trump 2.0&#34; economic growth agenda begins to provide real economic growth drivers (such as announcing tax cuts, deregulation, or reducing market crowding-out effects), or the Federal Reserve releases dovish signals regarding interest rate cuts, a reversal in the U.S. stock market is unlikely.
The so-called &#34;Fed Put,&#34; also known as the &#34;Powell Put&#34; or &#34;Greenspan Put,&#34; is not a real financial derivative but rather a market metaphor. This concept refers to the idea that when the U.S. financial markets (especially the stock market) decline significantly and the economic outlook worsens, the Federal Reserve typically intervenes, for example, by lowering interest rates, releasing liquidity, or providing other easing policies to support the market and prevent further declines in the stock market, provided that inflation is at the Fed's anchored target of 2%. Therefore, this implicit supportive behavior is metaphorically likened to a &#34;put option,&#34; with investors believing that the Fed will intervene when the market deteriorates to a certain extent, providing a certain level of protection.
The financial market suddenly got cold feet! Ahead of the Federal Reserve's decision and the release of the dot plot, bets on interest rate cuts have significantly cooled.
This week, Wall Street traders will focus on the Federal Reserve's updated economic forecast summary and dot plot, as well as a news conference by Fed Chairman Jerome Powell, where he will balance conveying the Fed officials' views on the current U.S. economy with the potential impact of the Trump administration's tariff trade policies. The Fed will release the latest version of its highly anticipated interest rate forecast &#34;dot plot,&#34; which will also hint at the general views of Fed officials on how Trump's &#34;tariff storm&#34; will affect the Fed's interest rate cut path this year and next.
Vishal Khanduja, Head of Broad Market Fixed Income at Morgan Stanley Investment Management, stated, &#34;Powell needs to acknowledge to the market that the U.S. economy is performing well, but they are prepared to act as needed.&#34;
In market pricing related to the Secured Overnight Financing Rate (SOFR), which closely tracks the Fed's expected policy path, traders have been betting that the Fed will keep rates unchanged ahead of the monetary policy meeting on June 18. On Monday, the so-called market &#34;hawkish hedge activity&#34; significantly increased, including various structures for May, June, and July maturities, indicating that the market is increasingly pricing in expectations that the Fed will not cut rates in June and July, rather than the ongoing pricing of a rate cut in June that has persisted since the beginning of the year. Tuesday's open interest data also showed new positions
At the same time, in the SOFR futures market, the short position basis for the June 2025 contract is beginning to form, with an increase in open interest (i.e., the number of new positions) over the past four trading days.
Citigroup strategist David Bieber stated in a report: &#34;In the past few trading days, long positions in SOFR and federal funds have been reduced from extreme levels, mainly due to the market's downward push against expectations of three rate cuts this year.&#34;
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In the spot market, a Tuesday survey of JPMorgan's U.S. Treasury clients showed that concerns similar to an economic recession are fading, with investors' net positions reflecting the lowest bullish positions in a month.
Julien Lafargue, Chief Market Strategist for Private Banking and Wealth Management at Barclays, stated: &#34;Ultimately, both the Federal Reserve and the market urgently need to understand the visibility of trade, tariffs, and overall policy paths. We expect Federal Reserve Chairman Powell to avoid using 'if' and 'but', and instead continue to advocate a data-driven hawkish tone.&#34;
Here is an overview of the latest positions or positioning indicators in the interest rate market:
JPMorgan Treasury Client Survey
For the week ending March 17, the JPMorgan U.S. Treasury client survey showed bullish positions decreased by 2 percentage points, while bearish positions increased by the same amount, with neutral positions remaining unchanged this week. The net positions of all clients subsequently fell to the lowest net bullish position since February 18. These indicate that the current market interpretation of the Federal Reserve's policy outlook has shifted from a &#34;wishful thinking&#34; rapid rate cut expectation to a more cautious baseline scenario.
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JPMorgan Treasury All Client Position Survey - Client Net Bullish Position Drops to Lowest Level in a Month
Treasury Options Premium
In the past week, a growing divergence and difference in option premiums have emerged at both the front and long ends of the U.S. Treasury curve, with traders continuing to pay increasingly higher option protection costs for the long end of the curve, while the premium for hedging the front end's rise has decreased. This is reflected in the price trend, with the curve flattening from around 35 basis points on March 11 to about 25 basis points at Tuesday's close.
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Options Market &#34;Butterfly and Vulture&#34; Dance Together, Revealing Cautious Fed Rate Cut Bets
Statistics show that in the past week, open interest for strike prices of 95.875 and 95.8125 has significantly increased, mainly due to large buying flows of the SOFR Jun25 95.875/95.8125/95.75/95.6875 put condor and SFRU5 95.875/95.625/95.375 put fly. Other new risk flows in the past week include buying SFRM5 96.00/96.25/96.375/96.50 call condor while selling SFRM5 95.75/95.625 put spreads.
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Most Active SOFR Options Strike Prices - Top 5 and Bottom 5 Net Changes in SOFR Options Strike Points Over the Past Week
SOFR Options Heat Map
Among SOFR Mar25, Jun25, and Sep25 options, the most popular strike price is now 95.625, with a significant increase in Sep25 put options in the past week, including buying SFRU5 95.625/95.125/94.625 put fly and SFRU5 95.875/95.625/95.375 put fly (put butterfly spread). Other flows include buying SFRM5 96.00/96.25/96.375/96.50 call condor (call vulture spread) while selling SFRM5 95.75/95.625 put spreads. The second most popular strike price is 96.00, with a large concentration of Mar25 and Jun25 call options as well as Sep25 put options.
For the March, June, and September 2025 expiration options, the currently favored strike price is 95.625, indicating a high market focus on the volatility of future interest rate paths. In particular, the large positioning of September (SFRU5) put options at the 95.625 level suggests that the market believes there may be significant downside risks to the benchmark interest rate by September or earlier, and it also indicates that the market has shifted its expectations for the Fed's first rate cut this year from June to July or September, reducing the bets on rate cuts for the entire year to 1-2 times, with the timing of the second rate cut possibly in December, but the market's betting intensity has clearly diminished.
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SOFR Options Open Interest - The 20 Most Popular Strike Prices for Mar25, Jun25, and Sep25 Options
Overall, the expectations for a Federal Reserve interest rate cut have significantly cooled, and the SOFR options market signals a &#34;cautious slow decline.&#34; In the short term, the market does not believe the Federal Reserve will cut rates sharply or quickly. The latest interest rate futures and options prices reveal that Wall Street traders increasingly expect the Federal Reserve will not rush to ease monetary policy, but may instead implement moderate rate cuts after mid-2025, with the pace of cuts depending on the progress of inflation decline.
CFTC Futures Positions
Statistics show that in the week ending March 11, CFTC data indicated that U.S. asset management companies closed long positions, while hedge funds slightly increased net duration shorts. Traditional asset management companies closed approximately 93,000 net duration long positions equivalent to 10-year U.S. Treasury futures, while hedge funds increased net duration shorts equivalent to about 18,000 10-year Treasury futures. Asset management companies closed the largest long positions in ultra-long 10-year Treasury futures, with a risk exposure of approximately $8.7 million/DV01.
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Ahead of the Federal Reserve's upcoming monetary policy decision and economic forecast summary, Wall Street traders have reduced their bets on interest rate cuts, seeking clearer guidance. Market expectations for the number and magnitude of rate cuts have significantly decreased, with traders pricing in only two cuts and anticipating the first cut to be implemented in the second half of the year. BlackRock's Chief Investment Officer Rick Rieder pointed out that the market is concerned about stagflation, where economic growth slows while high inflation persists, putting the Federal Reserve in a dilemma

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BlackRock

JPMorgan Chase

Citigroup

Morgan Stanley

Barclays

Apple

NASDAQ Composite Index

As the Federal Reserve's decision and dot plot are about to be released, the market suddenly got cold feet! Rate cut expectations have surprisingly experienced a "big cooling down."