JP Morgan now anticipates the Federal Reserve to deliver rate cuts consecutively throughout the year. They expect three 25 basis point rate cuts starting in September, differing from their earlier prediction of a single rate cut in December.
Initially, JP Morgan predicted 50 basis point rate cuts in Q1 2026, but their updated outlook has accelerated. The change in forecast is influenced by worsening labour market conditions, with a growing consensus forming around this perspective.
Fed Funds Futures Expectations
Fed funds futures are currently pricing in about 59 basis points of rate cuts by the year’s end. JP Morgan’s forecast leans toward a dovish approach, which may be supported if employment data weakens in the third quarter.
There is a growing belief that the Federal Reserve will start cutting interest rates more quickly, beginning as soon as September 2025. This view is based on a worsening labor market, suggesting the economy is cooling faster than previously thought. For derivative traders, this accelerates the timeline for positioning for lower interest rates.
This dovish outlook is supported by the most recent economic data. The July 2025 jobs report showed that non-farm payrolls grew by only 155,000, while the unemployment rate ticked up to 4.1%. Combined with core inflation that has cooled to 2.8%, the Fed now has more justification to ease policy.
We are seeing a direct response in short-term interest rate (STIR) futures, particularly in SOFR contracts for the coming months. The price of September and December 2025 SOFR futures has been climbing, which signals that the market is expecting lower rates. Traders should note that while the market has priced in about 59 basis points of cuts, a more aggressive three-cut scenario would mean these contracts have more room to run.
Options on Bond ETFs
Options on bond ETFs, such as the iShares 20+ Year Treasury Bond ETF (TLT), offer another way to position for this shift. Buying call options on TLT provides a way to bet on rising bond prices (and falling yields) with a defined risk. Bond market volatility, measured by the MOVE index, has been hovering around 110, indicating that significant price swings are expected as we approach the September Fed meeting.
We can look back to the summer of 2019 for a historical parallel, when the Fed pivoted from a tightening cycle to an easing one. In the months leading up to the first rate cut in July 2019, traders who positioned for falling rates saw substantial returns. History suggests the period right before the first cut is often the most critical time to act.
