National Bank of Canada analysts expect the Federal Reserve to restart rate cuts in March and June 2026, due to labour market risks even as growth and inflation remain firmer. They note that OIS markets have re-priced near-term rate cut odds and that the FOMC signalled a patient stance in January.
The analysts say the March cut could slip into the second quarter if non-farm payrolls do not weaken soon. They describe the easing window as narrow and short-lived before stronger GDP, renewed hiring and higher inflation return.
Fed Cut Timing And Market Pricing
They expect long-term US Treasury yields to stay largely range-bound through 2026. They also state that a tightening of the Fed’s balance sheet is not a key concern, but they do not expect longer-term bond yields to fall much.
We believe the Federal Reserve is getting ready to cut rates, possibly as soon as March, but this is far from certain. The probability of a March cut, implied by OIS markets, has fallen from over 75% last month to around 45% today. This repricing happened after recent data showed the economy is holding up better than expected.
The decision for a March cut now hinges almost entirely on the next Non-Farm Payrolls report. The January report showed a stronger-than-expected gain of 215,000 jobs, which challenges the view that the labor market is weak enough to justify immediate easing. Without a swift and significant softening in upcoming employment data, the first cut will likely be pushed into the second quarter.
For derivatives traders, this sets up a classic data-dependent trade where short-term volatility is underpriced. Options straddles on short-term interest rate futures could be an effective way to play the upcoming jobs report. This strategy profits from a sharp move in either direction, whether the data is weak enough to confirm a March cut or strong enough to delay it.
Range Bound Long End Trades
Looking further out, we see a very narrow window for the Fed to ease policy. We saw a similar pattern in 2025, where initial signs of weakness gave way to renewed economic strength, preventing a sustained period of rate cuts. This history suggests that even if cuts begin in March or June, they are unlikely to continue for long.
This view implies that long-term Treasury yields will remain range-bound throughout 2026. Therefore, traders should be skeptical of positions that rely on a major bond market rally. Selling volatility on longer-dated Treasury futures or ETFs through strategies like iron condors could be profitable, capitalizing on yields staying within a predictable channel.
