BNY’s Americas Macro Strategist John Velis is keeping a forecast for three Federal Reserve interest rate cuts by the end of the year. Market pricing points to a little more than two cuts, with the December OIS contract implying 56bp of easing.
He says recent headline labour figures may overstate strength because job gains in the establishment survey were concentrated in Health Care. He adds that this sector has accounted for almost all job creation since 2024, leaving a narrow base for overall employment growth.
Fed Cuts Outlook
He notes that inflation has improved compared with a few months ago but is still above the Fed’s 2% target. He also points out that inflation did not accelerate in the latest month, which could reduce support for more hawkish views on the FOMC if disinflation continues.
We are sticking with our call for three Federal Reserve rate cuts by the end of 2026, which is nearly one full cut more than the market is pricing. The market’s current pricing of 56 basis points of easing, as seen in December OIS contracts, presents a clear opportunity. This difference in outlook forms the basis for our trading strategy in the coming weeks.
The strong headline jobs numbers are misleading and mask a fundamental weakness in the labor market. Looking back at the data from 2025, we saw a consistent trend where most job creation was concentrated in acyclical sectors like Health Care, a pattern that continued with the January 2026 report showing over a third of gains came from that one area. This narrow base of employment is a worrying sign for the broader economy and supports a more dovish Fed stance.
Recent inflation data, while still above the Fed’s 2% target, is encouraging for our view. The January 2026 CPI report showed core inflation holding at 2.8%, marking the fourth consecutive month without an acceleration from the lows we saw at the end of 2025. This persistent disinflationary trend should weaken the arguments of more hawkish committee members.
Trading Strategy Ideas
Given this, traders should consider positioning for a greater degree of Fed easing than is currently reflected in the market. This could involve buying December 2026 SOFR futures, as their prices will rise if the market begins to price in a third rate cut. Establishing receive-fixed positions in interest rate swaps for the end of the year would also be a direct way to capitalize on this view.
The divergence between our forecast and market consensus suggests that interest rate volatility may be underpriced. If upcoming economic data forces the market to rapidly reprice the path of the federal funds rate, volatility will increase. Therefore, considering long volatility positions through instruments like swaptions could be a prudent secondary strategy.
