To The Moon

• Swaps market ramp-up policy rate cuts from June peak rate
• Odds of March pause rise, hike premium drops from May meeting

Traders in the interest rate swaps market have concluded after the Federal Reserve rate decision that policy direction is set for a deeper dovish pivot from the middle of this year.

Swap contracts tied to this year’s Fed meetings show approximately 50 basis points of rate cuts are now firmly priced between the June policy peak of 4.90% to the 4.40% overnight lending rate tied to the December policy meeting.

For the next March policy meeting, just 21 basis points of rate hike premium is now priced, suggesting odds of 84% that the Fed will go another quarter-point. Beyond this, the outlook for another hike in May has fallen.

Wednesday’s dovish sentiment was more than matched in the options market tied to the Secured Overnight Financing rate, where a massive structure targeting a policy rate as low as 2.5% by year-end traded in huge size before and after the central bank meeting. By the end of the day premium paid for the wager had topped $60 million.