BNY’s Americas Macro Strategist John Velis is keeping his forecast for three Federal Reserve interest rate cuts by year-end. Market pricing points to a little more than two cuts, with the December OIS contract implying 56bp of easing.
He says recent headline labour data may overstate strength because job gains in the establishment survey were concentrated in Health Care. He adds that this sector has driven nearly all job creation since 2024, leaving a narrow base for overall employment growth.
Fed Cuts Outlook
He notes that inflation has improved versus a few months ago, but it is still above the Fed’s 2% target. He also points out that inflation did not pick up in the latest month. If disinflation continues, this could weaken the case for more hawkish views on the FOMC.
We are sticking with our call for three Federal Reserve rate cuts by the end of 2026. That is almost one full cut more than the market is pricing. The market is currently pricing 56bp of easing, based on December OIS contracts, and we see this as a clear opportunity. This gap between our view and the market’s view is the basis for our trading strategy in the coming weeks.
The strong headline jobs numbers can be misleading and may hide weakness in the labor market. In the 2025 data, most job growth was concentrated in acyclical sectors such as Health Care. That trend continued in the January 2026 report, when more than a third of job gains came from Health Care alone. This narrow base is a concern for the broader economy and supports a more dovish Fed.
Recent inflation data also supports our view. Inflation is still above the Fed’s 2% target, but the trend is encouraging. The January 2026 CPI report showed core inflation holding at 2.8%. That was the fourth straight month without an increase from the lows seen at the end of 2025. If this disinflation trend continues, it should weaken the arguments of more hawkish committee members.
Trading Strategy Ideas
Based on this view, traders may want to position for more Fed easing than the market currently reflects. One approach is to buy December 2026 SOFR futures, which should rise if the market starts to price in a third rate cut. Another direct way to express this view is to enter receive-fixed positions in interest rate swaps for the end of the year.
The gap between our forecast and the market consensus also suggests interest rate volatility may be underpriced. If upcoming data forces the market to quickly reprice the expected path of the federal funds rate, volatility could rise. As a secondary strategy, traders could consider long-volatility positions using instruments such as swaptions.
Create your live VT Markets account and start trading now.
here to set up a live account on VT Markets now
