A week ago, most investors doubted that the regulator would decide to take a step in December. Now, about 80% of participants are confident in a decrease of 25 bp, and the futures markets instantly played it back: record trading volumes for the January contract were recorded for two days in a row.

Why rate-cut expectations strengthened

• Weakening labor market indicators (delayed, but data is finally out).
• Statements from John Williams of the NY Fed that a rate cut could become an option “for the foreseeable future.”
• Public support for a rate cut from Mary Daly and Stephen Meeran.
• The possible appointment of Kevin Hassett, a former Trump adviser and supporter of a soft monetary line, to the post of head of the Fed has increased confidence in a policy reversal.

Key point: the market is interpreting Williams’ comments as a signal consistent with Powell.

How markets reacted

• The yield on 10-year bonds fell below 4% for the first time in a month.
• According to JPMorgan, positioning in the Treasury market is the maximum “long” since 2010.
• In options on SOFR, there is a surge of interest in the strike price of 96.25 (rate 3.75%) – the market is actively hedging the December decision.
• Premiums on Treasury options are steadily shifted in the bullish direction – participants are willing to pay for growth.

Why uncertainty remains

However, skepticism has not disappeared. Morgan Stanley has already removed the December decline from its forecast. JPMorgan believes that the meeting will be “on the brink” and not a foregone conclusion. Even proponents of soft policies such as PIMCO admit that the situation beyond that remains uncertain. The economy appears resilient so far, with inflation still above target at 3%.

What the shift in expectations means for traders

The market is rapidly and confidently adjusting expectations in favor of the “dovish” scenario. But the Fed itself remains divided. And if inflation data in December brings an unpleasant surprise, the emerging consensus could quickly crumble. In the meantime, traders continue to bet on a decline – and quite aggressively.