A growing number of options traders are dismissing expectations for Federal Reserve rate cuts in 2026, instead placing bets that it will keep interest rates unchanged for the entire year. This trend can be traced back to at least last Friday, when U.S. employment data showed an unexpected drop in the unemployment rate.
Based on market pricing, this has nearly eliminated the possibility of a Fed rate cut this month and is prompting an increasing number of traders to push back their expectations for the timing of future rate cuts over the coming months.
David Robin, an interest rate strategist at TJM Institutional Services, noted, "From a data perspective, the probability that the Fed will hold rates steady at least until March has increased, and with each passing meeting date, the likelihood of rates remaining stable grows larger."
Recent options flow in Secured Overnight Financing Rate (SOFR) contracts, which are closely tied to the Fed's short-term benchmark rate, is conveying a more hawkish signal. New options positions are heavily concentrated in March and June contracts, designed to hedge against a scenario where the Fed's next rate-cutting action is continually delayed. Other positions targeting longer-dated contracts stand to profit from the Fed maintaining its current stance and holding rates steady all year.
Robin stated that whether the market believes the Fed will hold steady or not, the cost of these trades is low. As a prudent risk manager, one would want to hold such positions.
