A major reversal in bond market expectations! Options traders are increasing bets on a possibility: the Federal Reserve may not cut interest rates this year

The market has finally begun to accept the message conveyed by Powell: the Federal Reserve is not in a hurry to start lowering interest rates.

After Powell reiterated the Federal Reserve's "wait-and-see" stance on monetary policy last week, traders have actively increased bets that the benchmark lending rate will be cut by less than 75 basis points in 2025, with the first rate cut expected to begin in July.

Even more surprisingly, options traders are aggressively building hedging positions to guard against the risk that the Federal Reserve may not loosen monetary policy this year, with one growing position anticipating that the Federal Reserve will not cut rates in 2025. Before the latest employment data showed strong hiring in April, swap contracts indicated a high likelihood of a rate cut as early as next month.

In the coming weeks, the trajectory of the U.S. economy and inflation data will play a crucial role in the success or failure of these bets.

Discrepancies in Wall Street Expectations Widen! The Federal Reserve Faces a Dilemma Between Inflation and Employment

Wall Street's predictions for the extent of rate cuts this year range from 0 to 125 basis points, highlighting the high uncertainty in the market regarding the Federal Reserve's policy path. Economists from several major banks predict two to three rate cuts this year, starting in July or September.

Greg Peters, Co-Chief Investment Officer at PGIM Fixed Income, which manages over $850 billion in assets, pointed out:

" The bond market is accepting the fact that inflation will be higher than initially expected, which complicates investors' belief that the Federal Reserve will intervene and cut rates."

Franklin Templeton's Chief Investment Officer for Fixed Income, Sonal Desai, is even more decisive in her judgment:

"The market's pricing of rate cuts is quite excessive. Unless a recession occurs, the Federal Reserve will only cut rates by another 25 basis points this year."

Powell stated that as policymakers seek to gain more understanding of tariff policies, the risks of rising inflation and increasing unemployment have grown due to Trump's comprehensive tariffs. This puts the Federal Reserve in a dilemma.

Michael Krautzberger, Chief Investment Officer for Global Fixed Income at Allianz Global Investors, believes that the central bank will ultimately prioritize supporting the labor market as long as it is convinced that rising prices are mainly caused by tariffs. While soaring inflation may be temporary, the Federal Reserve will be wary of the potential long-term impacts on employment and growth.

David Rogal, a portfolio manager at BlackRock's fundamental fixed income team, added:

"Powell specifically mentioned that it is difficult to take preemptive action, and I think that is the main takeaway. Under this particular combination of tariff policies, along with the potential impacts on inflation and growth, the Federal Reserve needs to see more information."

Investment Strategy Shifts: Mid-term Bonds Favored

In this uncertainty, institutional investors are adjusting their strategies. Vanguard Senior Portfolio Manager John Madziyire stated that his company prefers to hold U.S. Treasury bonds with maturities of 5 to 7 years, "because the Federal Reserve clearly will not be aggressively cutting rates." At the same time, investors are closely watching the consumer price index data to be released this Tuesday, which could lead the market to change its views again. According to estimates compiled by Bloomberg, the consumer price index for April is expected to rebound from March, with a monthly increase of 0.3%.

Madziyire pointed out, "What is most frustrating right now is that the employment and inflation data we have is actually lagging," adding that data including tariff impacts may not be available until July