Traders still expect the Fed to make at least two big rate cuts in the near future

Traders in the U.S. interest rate options market are still betting on the Federal Reserve to make at least one super-sized rate cut during the year, except that it probably won't do it before the 5 November presidential election. With the Federal Open Market Committee's interest rate meeting looming next week, at first glance Fed swaps reflect expectations of a 25 basis point cut, with the probability of a more substantial cut being slim. But looking more closely is another story. Recent options activity related to the secured overnight financing rate suggests that traders are increasingly laying out positions for a rate cut of about 150 basis points ahead of the Fed's 29 January policy decision. This is the same scenario that is currently being digested in the swaps market. For this to be the case, without inter-meeting rate cuts, policymakers would have to implement at least half a percentage point cuts at two of their four previous meetings in January.