JP Morgan now expects the Federal Reserve to cut interest rates multiple times this year. They predict three rate cuts of 25 basis points each, starting in September. This is a shift from their earlier expectation of just one cut in December. At first, JP Morgan forecasted 50 basis point cuts in the first quarter of 2026, but they’ve changed their outlook. This update is due to worsening conditions in the labor market, and many analysts are starting to agree with this view.

Fed Funds Futures Expectations

Currently, Fed funds futures indicate about 59 basis points of rate cuts by the end of the year. JP Morgan’s projections suggest a more cautious approach, likely to gain support if employment data weakens in the third quarter. There is an increasing belief that the Federal Reserve will begin to cut interest rates more swiftly, possibly starting in September 2025. This outlook stems from a declining labor market, indicating the economy is slowing down quicker than expected. For traders in derivatives, this speeds up the timeline for preparing for lower interest rates. This cautious perspective is backed by recent economic data. The July 2025 jobs report showed only 155,000 new non-farm jobs, while the unemployment rate rose to 4.1%. Coupled with core inflation dropping to 2.8%, the Fed has stronger reasons to ease its policies. Short-term interest rate (STIR) futures are already reacting, especially in SOFR contracts for the coming months. The prices for September and December 2025 SOFR futures have been rising, indicating market expectations of lower rates. Traders should keep in mind that while 59 basis points of cuts are priced in, a scenario with three cuts could lead to even more movement in these contracts.

Options on Bond ETFs

Options on bond ETFs, like the iShares 20+ Year Treasury Bond ETF (TLT), provide another way to take advantage of this trend. Buying call options on TLT allows investors to bet on increasing bond prices (and falling yields) with limited risk. Bond market volatility, indicated by the MOVE index, has been around 110, signaling that significant price changes are expected as the September Fed meeting approaches. We can look back to the summer of 2019 for a similar situation, when the Fed shifted from tightening to easing. In the months leading up to the first rate cut in July 2019, traders who prepared for falling rates enjoyed significant profits. History shows that the time just before the first cut is often crucial for taking action. Create your live VT Markets account and start trading now.

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