Bond Traders Step Up 2026 Fed Cut Bets After Trump Bashes Powell

Bond traders are boosting bets that the Federal Reserve will cut interest rates more aggressively next year, as speculation mounts that an eventual change of leadership at the central bank will deliver the easier monetary policy that President Donald Trump is demanding.

Their conviction is showing up in the yield spread between SOFR futures maturing in December 2025 and December 2026, which reflect expectations of how deeply the Fed will cut rates in that period.

While the gap has slowly widened over the last several months as a resilient economy prompted traders to expect the Fed to delay rate cuts toward next year, the move accelerated after Trump ramped up his broadsides against Fed Chair Jerome Powell last week. 

Investors are now pricing 76 basis points of cuts next year, compared to just 25 basis points priced in as recently as April.

The shift shows how traders are increasingly convinced that a successor to Powell — whose term ends in May 2026 — will fall in line with the president’s demands for lower rates. 

While Trump last week quickly walked back threats to fire the Fed chief after they sparked a brief spasm in markets, investors appear to have latched onto the idea that he will succeed in bending the central bank to his will.

“Whoever comes in next, that person is going to have a bias towards lowering rates,” said Ed al-Hussainy, global rates strategist at Columbia Threadneedle. In addition, “the economy is less likely to be resilient next year,” opening the door for more policy easing, he said.

Powell has been under fire from Trump and his allies for holding back on rate reductions due to concern over the inflationary impact of the administration’s tariff hikes. 

A number of Republicans this month have also taken issue over a costly renovation of the central bank’s buildings.

Investors have recalibrated portfolios for a potential change of leadership at the Fed, while Wall Street strategists are churning out trade recommendations for a range of outcomes, including a possible Powell dismissal.

Potential candidates to replace Powell, including Kevin Hassett and Kevin Warsh, have all voiced their support for lower rates.

 Two Republican-appointed Fed governors — Christopher Waller and Michelle Bowman — have also signalled their openness to cutting rates as early as at the July 29-30 policy meeting.

While traders see zero chance for a rate cut next week, futures tied to the fed funds rate are reflecting a 58% probability for a 25-basis point cut in September as of Wednesday.

Trump will also have the opportunity to put a fresh stamp on the makeup of the Federal Open Market Committee when Governor Adriana Kugler’s term expires in January. 

Treasury Secretary Scott Bessent recently floated the idea of having a Fed chair name emerge in October or November, ahead of that opening on the board.

The SOFR spread trade has been a winner for Jordan Rochester, head of FICC strategy for EMEA at Mizuho Bank, who recommended it to clients in early June.

 He and his team entered the trade at 53 basis points and expect the spread to widen to 100 basis points, due in part to the possibility of a more dovish Fed chair.

“Client questions have been less on what we think for the US inflation and labour market this week, but more on the various options a new Fed chair could have to please the president,” he said.

Philip Marey, senior US strategist at Rabobank, changed his Fed call on Monday. He now expects the central bank to cut rates four times next year, following one reduction in September 2025. Previously, he had seen the Fed holding rates steady throughout 2026 after cutting once this year.

Dovish comments from Waller and Bowman convinced Marey that a new Fed chair could gather enough support among the 12 voting members at the FOMC to lower rates.

“I now expect a regime change next year” at the Fed, said Marey. “The Fed is able to resist Trump for this year, but as the new appointments go on in the beginning of next year, their opposition is going to crumble.”