The Divided Fed Has Bond Traders Hedged a Wide Range of Policy Outcomes

Investor expectations for Federal Reserve rate cuts have shifted sharply, with traders now pricing in fewer reductions for the remainder of 2025. The change highlights how conflicting messages from Fed officials have made it harder to pin down the central bank’s path forward.

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Derivatives tied to the Secured Overnight Financing Rate (SOFR) reveal that many market participants are now leaning toward just one additional 25-basis-point cut this year. At the same time, traders are adjusting their outlook for the so-called neutral rate — the level at which monetary policy neither stimulates nor restricts growth — to sit higher than previously assumed. That marks a stark reversal from only a week ago, when bets on a 50-basis-point cut by year-end were gaining momentum.

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A widening range of views from Fed officials has fueled these swings in positioning. Traders have been actively hedging scenarios in which the central bank delivers more aggressive cuts, alongside those where policymakers take a more measured approach.

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Stephen Miran, the Fed’s newest board member, said this week that policy is still too restrictive. He argued for as much as 125 basis points in reductions over the Fed’s final two meetings of 2025. By contrast, Atlanta Fed President Raphael Bostic cautioned on Tuesday that the central bank must remain vigilant about inflation.

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Fed Chair Jerome Powell also struck a cautious tone in a separate speech the same day, warning that risks remain on both sides of the mandate — a labor market that is slowing and inflation that could stay sticky. Notably, Powell gave no indication of whether he supports another cut at the October meeting.

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“The recent stream of commentary has really underscored the wide split shown in the dot plot,” said John Canavan, an analyst at Oxford Economics, referencing the chart that lays out policymakers’ projections for the federal funds rate in the years ahead.

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Last week, the Fed made its first move of the year by lowering the target range for the policy rate to 4%–4.25%. In the days that followed, trading patterns suggested growing skepticism that two more cuts of 25 basis points each — currently embedded in swap pricing — would materialize. Instead, traders added positions pointing to a shallower easing cycle and a neutral rate closer to 3%.

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At present, interest rate swaps imply a neutral rate near 2.95% and about 40 basis points of additional easing across the two remaining FOMC meetings this year.

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Recent positioning surveys and options flows shed light on how investors are recalibrating their outlook.

JPMorgan Treasury Client Survey
For the week ending Sept. 22, outright short positions rose by 4 percentage points to their highest since early February, according to JPMorgan’s all-client survey. Long positions also climbed, while neutral positions dropped by 7 percentage points, suggesting a growing conviction among investors.

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Most Active SOFR Options
Activity has been concentrated in December 2025, March 2026, and June 2026 contracts. Over the past week, significant new risk has been added to Z5 96.50 calls and Z5 95.875 puts. Notable trades included outright buying of the 96.50 calls at 2.75 and complex strategies like SFRZ5 96.1875/96.3125/96.50/96.625 call condors, as well as similar structures with the 96.25 and 96.375 strikes.

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Meanwhile, there has been strong demand for Z5 95.875 puts, with roughly 35,000 contracts bought in recent sessions at prices between 0.25 and 0.5. In contrast, Z5 95.625 calls saw heavy liquidation last week.

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SOFR Options Heatmap
Looking at activity across Dec25, Mar26, and Jun26 maturities, the 96.50 strike has emerged as the most active. Dec25 calls dominate open interest at that level, as traders use the strike to express views on the likelihood of a half-point rate cut at one of the Fed’s remaining meetings this year.

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The sharp repricing in Fed rate cut expectations reflects just how unsettled the monetary policy outlook has become. With Fed officials delivering diverging messages — ranging from calls for aggressive easing to warnings about inflation — traders are hedging both extremes.

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For investors, the takeaway is clear: uncertainty around the Fed’s policy path will remain elevated heading into the final stretch of 2025. Markets may continue to swing as each new speech, data release, or policy signal shifts the balance between the risks of weaker growth and persistent inflation.

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