"Shadow Chairman" effect emerging? Traders are betting heavily that the Federal Reserve will quickly cut interest rates after Powell steps down

The Zhitong Finance APP learned that U.S. interest rate traders are betting that after the current Federal Reserve Chairman Jerome Powell's term ends in May 2026, the Federal Reserve will quickly shift to a more dovish monetary policy. The core assumption of this bet is that after U.S. President Trump appoints Powell's successor, the new Federal Reserve Chairman will initiate interest rate cuts at their first monetary policy meeting (expected in June 2026). The trading volume related to this bet set a historical record on Monday and continued to expand on Tuesday.

Although Trump has been urging Powell to cut rates in recent months, Federal Reserve officials have repeatedly stated that they are still observing the impact of tariffs on the economy and inflation. The market generally expects that the Federal Reserve will maintain interest rates at its meeting on Wednesday and may lower expectations for rate cuts this year to address the upward pressure on prices caused by tariffs.

On Wednesday, investors will focus on the latest dot plot provided by the Federal Reserve. The market generally expects that Federal Reserve officials will predict one rate cut (25 basis points) in 2025, while the median forecast released in March was for two rate cuts. Currently, traders are betting that the Federal Open Market Committee (FOMC) will cut rates by a total of about 43 basis points by the end of the year, with the earliest possible cut of 25 basis points in September, but more likely in October.

Traders' bets are concentrated in the futures market linked to the Secured Overnight Financing Rate (SOFR). SOFR serves as an important tool for measuring expectations of Federal Reserve policy, and its related contracts quickly attracted traders' attention after Trump stated this month that he would "soon" announce the next Federal Reserve Chairman candidate.

The way to bet on interest rate futures includes shorting SOFR futures contracts expiring in March 2026 while going long on SOFR futures contracts expiring in June 2026. This is a typical "three-month spread trade," which has caused a certain degree of disruption in the futures market from the end of 2025 to the first half of 2026. Due to significant selling pressure on the March contract, its relative price weakened significantly compared to the December 2025 and June 2026 contracts, leading to a surge in the relative price spread of the March 2026 futures to its highest level since January.

According to statistics, the trading volume reached 108,649 contracts on Monday. The open interest for the March and June contracts also rose to the highest level of the current policy cycle, reflecting strong demand for this strategy to some extent. However, since most futures trading is conducted anonymously, it is still difficult to determine the specific institutions or trading details involved.

Standard Bank G10 Strategy Head Steven Barrow noted in a report: "Trump may choose a successor who clearly supports loose monetary policy, although this could make the appointment process more difficult in Congress." Gavekal Research economist Will Denyer and others also warned that if Trump nominates the next Federal Reserve Chairman in advance, it could create a "shadow" Federal Reserve Chairman situation for up to a year, requiring investors to pay attention to both Powell and this new candidate's statements "This kind of chaotic sound may further undermine the market's confidence in U.S. policymaking."

It should be clarified that the Federal Reserve's monetary policy is collectively decided by the Federal Open Market Committee, and the Federal Reserve Chair does not unilaterally set the policy interest rate