Traders are betting the Fed will cut rates 12 times by March

Traders in the US interest rate options market are accepting a new emerging bet related to the trend of the Federal Reserve's interest rates: there will be a cut of up to 300 basis points (equivalent to 12 rate cuts of the usual 25 basis points) in the next nine months. In the past three trading days, the positions in the options market related to overnight financing rates with guarantees show that these bets will benefit if the Fed lowers rates to a low of 2.25% in the first quarter of 2025. This result seems unlikely unless the US economy suddenly falls into recession. Considering that the market expects the Fed to cut rates by about 75 basis points during this period, this is a radical bet. Fed officials recently predicted a total rate cut of 125 basis points by the end of 2025, with only a 25-basis-point cut by the end of this year. Now, some people are increasing their bets to hedge against the consequences of tail risks, such as rapid and extreme rate cuts.