Traders boldly bet that the Federal Reserve will cut interest rates 12 times before March next year

Traders in the U.S. interest rate options market are taking on a new bet related to the trend of Federal Reserve rates: there will be up to 300 basis points of cuts (calculated as 12 cuts at the regular 25BP range) within the next nine months. Over the past three trading days, positions in the options market related to secured overnight financing rates have shown that these bets would benefit if the Fed lowers its rate to a low point of 2.25% in Q1 2025. Unless the U.S economy suddenly falls into recession, this outcome seems unlikely.

Considering that markets expect about a 75 basis point cut from The Fed during this period, it's an aggressive bet. Federal Reserve officials recently predicted only a 25 basis point cut by year-end and a total of 125 basis points by end-2025. Now, some people are also starting to increase their bets as hedges against tail risk consequences such as rapid and extreme rate cuts.