Economists Predict Rate Cuts

In a recent Reuters poll, 59 out of 105 economists expect the Federal Reserve to start cutting interest rates again in the next quarter, likely in September. Over 60% of economists also believe the Fed will make at least two rate cuts in 2025. Current predictions for U.S. economic growth remain stable, with estimates of 1.4% for 2025 and 1.5% for 2026. Some even think growth could hit 3% or higher during that time. This article shows a strong agreement among economists that U.S. interest rates may decrease starting in the third quarter of this year—most likely in September. This suggests that the current monetary policy may be changing. Furthermore, more than half of the analysts expect multiple cuts next year, reinforcing this idea. They believe that inflation is slowing down and the labor market doesn’t require aggressive tightening anymore. Projected economic growth is modest, hovering just below 1.5% for both 2025 and 2026. However, some analysts forecast growth reaching 3% or more. While these optimistic estimates are less common, they should not be ignored. They often come from those who emphasize private investments, government spending, and increased consumer spending once rates lower. From our view, this context creates a narrow range of expectations in the near term and reduces the chance of unexpected policy changes. In recent comments, Powell remained consistent with earlier messages, suggesting that rate cuts would follow a period of sustained disinflation. Markets generally accept this viewpoint but may not be as enthusiastic as they would be under easier circumstances.

Focus on Derivatives Trading Strategy

In this cautious context, derivatives traders should proceed carefully. Futures contracts are already indicating September as a potential turning point, but we advise checking how far this assumption extends along the curve. Initial parts of the yield curve align well with these forecasts. However, further down the line, there is more chance for discrepancies, especially if growth surprises on the upside or inflation rises again. We’ve observed a shift toward caution in short-term rate options. Implied volatility for these products has increased slightly, reflecting uncertainty about the time between now and the end of July, rather than skepticism about the September cuts. Traders in this area should reconsider their skew patterns and see if protective spreads still offer good value. Additionally, we’ve noticed a steady narrowing in Treasury-OIS spreads, indicating growing confidence in the near-term rate trajectory. This reduces the appeal of highly directional bets in the shorter maturities. Instead, it might be better to focus on relative value across tenors or pursue curve steepening, as the longer end could adjust more if growth data strengthens beyond expectations. If these rate path expectations remain intact, a significant risk arises from how quickly market sentiment could shift with even a few unexpected data points. Core PCE or NFP results above expected levels might lead to a serious reevaluation. Therefore, instead of heavily leaning into the current consensus, we favor strategies with optionality and asymmetric payoffs—positions that won’t suffer much from premature moves but could yield rewards if timed correctly. Finally, we’re keeping an eye on global flows. While the Fed sets the tone, foreign demand for U.S. debt and fiscal policy changes could influence yields independently of official rate moves. If any volatility surprises arise from these factors, traders focusing solely on domestic dates might find themselves caught off guard. Create your live VT Markets account and start trading now.

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