Concerns Over Economic Recession Boost 'Three Rate Cut' Bets

As concerns about an economic recession grow in the U.S. market, investments are increasing on the expectation that the Federal Reserve's (Fed) rate cuts will occur faster than anticipated.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). Photo by Getty Images Yonhap News

On the 11th (local time), Bloomberg reported that option prices linked to SOFR, the Fed's one-day overnight rate, reflect a growing possibility of several rate cuts by the end of this year.

On that day, the market expected about an 80bp (1bp = 0.01 percentage points) rate cut by the end of this year. This is an increase compared to the 60bp cut reflected last week. However, the market expects no rate cuts until June. This implies that investors anticipate growing calls for rate cuts to stimulate the economy within a few months.

According to the Chicago Mercantile Exchange (CME) FedWatch Tool, the probability of a 75bp cut in the federal funds rate futures market by the end of this year was 32.7%. Meanwhile, the probability of a 50bp cut was recorded at 23.1%.

Option investments linked to rate cuts are expected to be influenced by the Consumer Price Index (CPI) for February, which will be announced on the 12th. The current market expects a 2.9% increase compared to the same period last year.

Fed Chair Jerome Powell maintains his stance of not rushing monetary policy decisions until the impact of the Trump administration's policies becomes clearer. In a speech at the Monetary Policy Forum held in New York on the 7th, Powell said, "We do not need to hurry and are in a good position to wait until the effects of policy changes become clearer."

He explained, "The new administration is pursuing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation," adding, "What matters for the economy and monetary policy direction is the net effect of these policy changes."

He continued, "There has been progress in some areas, including recent trade policies, but uncertainty about policy changes and their potential impacts remains high," and said, "We are focusing on analyzing new information to distinguish signals from noise."