Traders are ramping up bets on Fed rate cuts in 2025–2026, expecting a new Fed Chair

Bond investors are increasingly betting the Fed will cut rates next year, expecting a new chair to follow Trump’s push for easier policy.

That view shows up in the gap between SOFR‐linked futures expiring in December 2025 versus December 2026, according to Bloomberg. It indicates expectations for how far policy easing might extend over that period.

Although this gap had been slowly expanding in recent months as a resilient economy delayed rate cut forecasts. However, it surged after Trump stepped up his public criticisms of Fed Chair Jerome Powell last week.

Traders are now setting roughly 76 basis points of reductions for next year, a marked increase from the 25 basis points priced in as of April.

This shift reflects growing conviction that Powell’s successor, whose term runs through May 2026, will align with the president’s push for lower borrowing costs.

Even after Trump retreated from hints of firing the Fed chief, investors remain confident he’ll steer monetary policy.

“Whoever comes in next, that person is going to have a bias towards lowering rates,” said Ed Al‑Hussainy, a global rates strategist at Columbia Threadneedle. He added that “the economy is less likely to be resilient next year,” making it easier to ease policy.

Political pressure mounts on the Fed

Powell has taken heat from GOP leaders for resisting cuts amid concerns that the administration’s tariffs could stoke inflation. Some Republicans have also criticized the Fed’s recent, high‑cost renovation of its headquarters.

Asset managers have repositioned portfolios in anticipation of a new Fed Chair, while Wall Street strategists are drafting trade plans for a variety of outcomes, including the remote possibility of Powell stepping down.

So who will replace Powell? Potential Fed Chair picks, Kevin Hassett and Kevin Warsh, have already voiced support for trimming rates. And governors Christopher Waller and Michelle Bowman, both Trump appointees, have hinted they could back a cut as early as the July 29–30 policy meeting.

Traders assign virtually no probability to a move at the upcoming gathering, yet fed‑funds futures imply about a 58% chance of a quarter‑point reduction in September.

Trump may announce chair pick this fall

Trump will also influence the Fed’s voting lineup when Governor Adriana Kugler’s term expires in January. Treasury Secretary Scott Bessent has even proposed naming a new chair pick in October or November, before the vacancy occurs.

The SOFR spread strategy has paid dividends for Jordan Rochester, head of EMEA FICC strategy at Mizuho Bank.

He advised clients to establish the position in early June around 53 basis points, predicting it could expand toward 100 basis points if a dovish Fed Chair takes over.

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

Meanwhile, Philip Marey, senior U.S. strategist at Rabobank, updated his outlook on Monday to forecast four rate cuts next year, beginning in September 2025. Previously, he saw only one trimming this year and none afterward.

Comments from Waller and Bowman convinced Marey that a dovish successor could win enough backing among the 12 FOMC voting members to push through reductions.

“I now expect a regime change next year,” Marey said. “The Fed can hold out this year, but once new appointments begin, their resistance is going to crumble.”

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