Insights 
VT 
The recent trend in interest rate expectations may be inaccurate. The announcement between the US and China exceeded global expectations and could lead to improved global growth forecasts.
Businesses have been cautious due to tariff uncertainty, which has hindered economic activity. With positive resolutions, this activity may increase swiftly, potentially affecting inflation and necessitating a cautious Federal Reserve approach.
Interest Rate Expectations
The Fed is likely to deliver at least one rate cut by 2025, although earlier expectations had suggested up to five cuts. Market sentiment has shifted to anticipate two rate cuts, totalling 55 basis points, reflecting a change since last month.
Economic developments following recent announcements will determine the actual number of rate cuts. In the short term, the US Dollar is expected to strengthen as a result of interest rate adjustments, but a renewed focus on global growth may influence its value.
What we have here is a picture that challenges the prevailing market assumptions about the direction of interest rates in the United States. The initial optimism surrounding multiple rate cuts has faded, replaced by a more measured view. Traders were expecting the Federal Reserve to ease policy more aggressively this year — potentially with five distinct rate reductions. That has now moderated, and investors are adjusting to the idea of perhaps only two rate cuts before the end of next year. A shift of this magnitude doesn’t happen by accident; it reflects changed thinking about where global growth, inflation, and policy are all headed.
Global Economic Changes
Part of this change in interpretation stems directly from an announcement made between the United States and China — an announcement which outstripped what most had pencilled in. The breakthrough has removed one of the heavier weights on trade, likely freeing firms to move ahead with investments they had shelved out of uncertainty. That hesitation on the part of businesses had limited hiring, reduced purchasing, and generally suppressed economic momentum. Without that drag, there’s every possibility of a quick rebound in activity. Such a rebound wouldn’t be invisible at the central bank — it would almost certainly feed into consumer prices and complicate attempts to ease.
Powell now finds himself needing to balance several competing influences, with inflation still sticky in several components. A rapid return of pent-up demand, particularly in industrial activity and logistics, would not go unnoticed. And while the longer-term view still suggests some room to cut later, the near term might reveal tighter conditions. This helps explain why the U.S. Dollar has found fresh strength — even while the broader discussion remains one of eventual rate reductions.
As position holders, we must now reassess how short-term rates will behave in parallel with broader growth expectations. Front-end Treasury contracts have already begun to price in the pullback in cuts, especially beyond the summer. The two-year yield, for example, has responded accordingly as traders lower the odds of aggressive policy loosening. For those with exposure to spreads or options structures, it becomes necessary to recalibrate to reflect this shift — not blindly, but based firmly on underlying data.
Yellen’s department will likely be watching the downstream effects of increased commercial activity — especially cross-border — as it could put upward pressure on commodities, complicating inflation further. The strength of the greenback, while supportive of lower import costs, might be offset by renewed input demand globally. Accordingly, implied volatility in currency options tied to the U.S. unit remains elevated, particularly in shorter-dated contracts.
In eurodollar and SOFR futures, open interest has shown some repositioning after last week’s statements. There’s an observable preference for mid-curve hedges, implying less conviction around immediate central bank action but growing uncertainty about late-year moves. We are seeing more structured positions emerge — not out of speculation, but because managers need protection if this direction veers unexpectedly once again.
It’s worth highlighting that much of the narrowing in policy expectations has come not from less concern over inflation, but from increased belief in how quickly pent-up demand could resurface. The feedback loop from trade to hiring to spending and back into prices is quick and at times underestimated. Even marginal changes in PMI data or input costs could help or hinder the present outlook.
When reading these developments, traders need to stay responsive. Being early is not the same as being correct, especially when timing rate exposure. Matching temporality with precision is not easy. Now more than ever, it’s sensible to maintain optionality — not necessarily because volatility is predicted, but because the chance of being wrong has increased. The pricing in swing points between September and January is already becoming tighter than any time this year — and that matters a great deal.
