Traders reduce bets on Fed rate cuts, probability of June rate cut drops to 50%, hitting a yearly low.

Against the backdrop of rising risk appetite, market expectations for the Fed to start cutting rates before mid-year have cooled significantly.

The probability of a 25 basis point rate cut by the end of June has dropped to 50% in the money market, the lowest level this year, indicating investors are reassessing the path of monetary easing.

Swap contracts show that the rate cut before mid-year is only about 12.5 basis points, lower than the 27 basis points expected earlier this month. Bets on the cumulative rate cut before year-end have also dropped to 52 basis points, a clear narrowing from 62.5 basis points at the start of last week.

Last month, the Federal Reserve kept the federal funds rate in the 3.5%—3.75% range, after three consecutive rate cuts during last autumn. Traders widely expect the March meeting to remain unchanged.

Rate cut expectations clearly retreat, 50% probability for June 25bps cut

With risk assets performing better, the market’s pricing of easing policy is gradually converging. According to the latest swap data, investors are only pricing in about a 12.5 basis point rate cut before mid-year, a slight drop from Tuesday’s 13 basis points and far less than the 27 basis points earlier this month.

This means the probability of a 25 basis point rate cut at the June meeting has dropped to 50%, the lowest level this year. This change reflects weakening market confidence in "early easing."

Looking at the full-year path, traders expect a cumulative rate cut of about 52 basis points before year-end, further down from the previous 53 basis points and 62.5 basis points at the start of last week. Overall, the market is shifting toward a “less and later” pace of rate cuts.

Officials signal caution, emphasize inflation remains above target

The shift in policy signals is an important reason for the market’s repricing.

On February 24 local time, Goolsbee said at the National Association for Business Economics annual meeting in Washington that it is not appropriate to cut rates further until more evidence proves inflation is persistently declining. He pointed out that in the past, “misjudging inflation as temporary” was costly, and mistakes should not be repeated.

He stated bluntly, “3% inflation is not good enough,” which is not the guarantee made when the Fed committed to the 2% target. Unless inflation returns to the target path, preemptive or concentrated rate cuts are not prudent.

The minutes of the January meeting released last week also showed that many officials want to see more progress on inflation before supporting further rate cuts. This statement reinforces market expectations for a status quo policy in the short term.

According to U.S. Department of Commerce data, December PCE was 2.9%, and core PCE was 3%. Although significantly down from previous highs, it’s still above the 2% policy target. Goolsbee further noted that with 3% inflation, it is hard to claim current rates are “obviously restrictive.” This means the Fed may have limited room for rate cuts.

He previously voted against the rate cut decision in December, advocating for no change. But this year, under a rotation system, he will participate in FOMC decision-making as a non-voting member.

Market impact: risk appetite rises, but pace of easing becomes restrained

From a market perspective, the pullback in rate cut bets coincides with rising risk appetite, indicating increased investor confidence in economic resilience.

However, adjustment in rate path expectations also means the bond market’s pricing for rapid easing faces corrections in the short term. If subsequent inflation data fails to improve significantly, market confidence in rate cuts starting mid-year may be further shaken.

Overall, current pricing has shifted from the previous “aggressive easing” expectation to a more cautious and gradual path. For investors, uncertainty in policy rhythm will remain a key variable affecting asset prices over the next few months.

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