Before the Federal Reserve announces its interest rate decision, traders' expectations for rate cuts have cooled: betting on only three times this year

According to Zhitong Finance APP, traders are betting that the Federal Reserve's pace of interest rate cuts will slow this year, as the resilience of the economy forces policymakers to remain on hold for a longer period before significantly easing monetary policy in 2026 compared to previous expectations. Just a day before the Fed announces its latest interest rate policy decision, the money market expects three rate cuts of 25 basis points this year, one less than anticipated in early April. Traders also expect an additional cut of about 50 basis points next year, marking the highest expectation for rate cuts in 2026 during the current easing cycle.

Traders will closely monitor Fed Chairman Jerome Powell's speech on Wednesday for clues on whether President Trump's economic policies have prompted policymakers to change their views on the timing of further rate cuts. The market expects the Fed to keep the benchmark rate stable at 4.25%-4.50% on Wednesday. Ahead of the "quiet period" before this meeting, officials have urged all parties to remain patient, especially considering that the U.S. tariff increases will exacerbate recent inflationary pressures.

Since the employment data released last Friday was stronger than analysts expected, market expectations for a rate cut at the June policy meeting have also weakened. The U.S. April ISM services data released on Monday also hinted at a strengthening economy, increasing pressure on front-end yields that are particularly sensitive to monetary policy.

Kevin Flanagan, head of fixed income strategy at Wisdom Tree, stated, "Unless something bad happens between now and June, this means the Fed does not need to cut rates." He added that given the Fed's prediction in March of two rate cuts this year, short-term yields are easily susceptible to shocks.

Options market traders are also preparing for rate cuts later on. For example, a specific position hedging against a significant rate cut has just been extended for the second time in a few weeks. Data from the Chicago Mercantile Exchange shows that after the April non-farm payroll data was released, there was a significant amount of deleveraging and position closing at the front end of the yield curve, consistent with long position closures.

In the spot market, market confidence remains low as investors struggle to cope with Trump's trade policies and their potential impact on central bank policies. A survey by JP Morgan of U.S. Treasury clients on Tuesday showed that neutral positions remain high, close to annual highs