Tariff clouds loom, traders increase hedging against Federal Reserve interest rate volatility risks

According to Zhitong Finance APP, due to the ongoing uncertainty regarding the impact of the Trump administration's changing policies on the economy, traders are increasing their bets to hedge against the risks of drastic changes in the Federal Reserve's interest rate path.

Overall, the swap market is still digesting expectations that the Federal Reserve will cut interest rates twice starting in October this year. However, the uncertainty surrounding the U.S. economic outlook has prompted traders to purchase options to prepare for a broader range of rate cut outcomes, from no cuts at all to a continuous 50 basis point cut by the end of 2025. Goldman Sachs and Citigroup hold opposing views on when the Federal Reserve will begin to cut rates.

So far, strong economic data such as the increase in job vacancies and the rebound in hiring in April has supported the view that the Federal Reserve will keep rates unchanged. However, U.S. President Donald Trump's trade policies could disrupt the labor market and exacerbate inflation, forcing the Federal Reserve to take action.

Goldman Sachs strategists, led by William Marshall, stated, "If tariff fluctuations continue for another week, interest rates will remain unchanged, and the future trend remains unclear." Goldman Sachs expects that by 2026, the magnitude of rate cuts will be greater than this year.

The money market agrees with Goldman Sachs' view, continuing to push rate cut expectations into next year. There is even a viewpoint suggesting that the Federal Reserve will not cut rates at all this year, a perspective that has been discussed again in the past week.

Open interest continues to increase, currently reaching about 250,000 contracts, equivalent to approximately $25 million in premiums. This position contrasts with the swap market's current expectation of a 50 basis point rate cut by the end of the year.

Traders expect the Federal Reserve to delay rate cuts.

On the other hand, some extreme dovish hedging operations have also emerged in recent trading days, including targeting a series of 50 basis point cuts by the end of the year. Citibank expects rate cuts this year and recommends establishing positions "to hedge against rising downside risks."

The employment report for May, released on Friday, may influence these trades and affect policy expectations. The data is expected to show a slowdown in job growth, with the unemployment rate remaining stable