Traders betting Fed will cut rates at least 4 times this year to bail out economy

 

Traders Betting Fed Will Cut Rates at Least 4 Times This Year to Bail Out Economy

April 2025

Wall Street is once again banking on the Federal Reserve to ride to the rescue.

Amid mounting signs of economic deceleration, market participants are ramping up bets that the Fed will slash interest rates at least four times before the year ends—an aggressive policy shift that would mark a dramatic turn from the hawkish stance that dominated much of 2023 and early 2024.

According to interest rate futures data, traders are pricing in more than 100 basis points of rate cuts by December, with some positioning for as many as five reductions. The growing consensus reflects deepening concern that a combination of slowing growth, cooling inflation, and renewed financial stress could push the central bank into action—whether it wants to or not.

Signs of Stress Mounting

Recent economic data paints a picture of a U.S. economy losing momentum. Job growth has moderated, consumer spending is softening, and business investment has stalled. Manufacturing surveys continue to hover in contraction territory, while consumer confidence has dipped to levels not seen since the early months of the pandemic.

Meanwhile, the inflation dragon that the Fed has spent two years trying to slay appears to be retreating. Headline CPI has eased steadily, and core inflation is now approaching the Fed’s 2% target. Though officials remain cautious, arguing that more evidence is needed to confirm inflation’s retreat is sustainable, traders believe the writing is on the wall.

Adding to the urgency are signs of stress in the financial system. Regional banks continue to wobble under the weight of commercial real estate losses and deposit flight, reigniting fears of a broader credit crunch.

A Shift in Tone

While Fed Chair Jerome Powell and other officials have maintained a cautious tone, the central bank’s language has softened in recent months. At the March FOMC meeting, Powell acknowledged that "policy is well into restrictive territory" and said the Fed would be "prepared to respond as needed" to changing conditions.

Translation: the door to rate cuts is open, and markets are barging through it.

"The Fed may not want to be seen as bailing out the economy, but that’s exactly what this looks like," said Priya Misra, head of global rates strategy at TD Securities. "The market is calling the bluff—they see the data, and they know the Fed won't wait until the recession is fully entrenched."

Risk of Miscalculation

Still, some analysts warn that the market could be getting ahead of itself. The Fed has emphasized its desire to avoid the mistakes of the 1970s, when premature rate cuts reignited inflation. If inflation proves sticky or geopolitical tensions push oil prices higher, the Fed could be forced to hold its ground longer than traders anticipate.

"There’s a real risk here that the market is mispricing how patient the Fed will be," said Michael Gapen, chief U.S. economist at Bank of America. "Cutting rates too soon could undo all the progress they’ve made on inflation."

The Political Backdrop

With the 2024 election now behind and a new administration in the White House, the Fed is navigating a politically charged environment. Though officially independent, the central bank is not immune to pressure—especially as unemployment edges higher and public frustration with economic conditions grows.

Some economists argue the Fed will err on the side of accommodation to avoid being blamed for tipping the economy into a recession during a fragile recovery.

Looking Ahead

Whether the Fed ultimately delivers four cuts—or more—will depend on how the next few months unfold. For now, traders are betting that Powell & Co. will prioritize stability over orthodoxy.

“The Fed doesn’t want to be seen as bailing out markets,” said Misra, “but if the economy stumbles, they’ll have no choice. Cuts are coming. The only question is how fast and how deep.”

As the economic clouds gather, investors are once again asking a familiar question: How far will the Fed go to bail out the economy?