The selection of the Federal Reserve Chair becomes clearer, and economic data will be released intensively, leading to increased market bets on interest rate cuts

Traders are making large bets that the choice of the new Federal Reserve chair and the delayed economic data to be released this month will support President Trump's calls for interest rate cuts.

In the U.S. futures market, demand for the short-end rate curve structure linked to the Secured Overnight Financing Rate (SOFR) is increasing, which is highly correlated with market expectations for the Fed's policy rate. These bets reflect a possibility: after Powell's term as Fed chair ends in May next year, the pace of monetary policy easing may accelerate. June 17 will be the first decision under the leadership of the new Fed chair.

New positions have begun to accumulate since Kevin Hassett, the director of the White House National Economic Council, became the frontrunner to succeed Powell. Trump stated on Tuesday that there is "only one person left" in the selection process and referred to Hassett as a "potential Fed chair" during a cabinet meeting. He indicated that he would announce the final decision early next year.

Industry insiders point out that this announcement will create a shadow Fed chair. This could pose greater challenges for the Fed in communicating monetary policy and may bring some confusion at a time when the market needs clarity the most.

Traders in the leveraged futures market have begun to simulate various scenarios: on Monday, a large buyer surged into a certain SOFR futures butterfly structure, marking the largest trade in that structure in over a year. The activity of 3-month, 6-month, and 12-month SOFR spreads has also significantly increased in recent trading days, as traders seek more ways to bet on interest rate cuts.

The activity driving futures spreads is not solely related to the Fed chair personnel. On December 16, the U.S. labor market data for November will be released, coinciding with the Fed's January policy meeting. Due to the government shutdown delaying the data, if the data confirms recent signs of weakness, it may drive more dovish bets.

Industry analysis suggests that, considering the trend of labor market slack indicators, short-end rates are more likely to reflect rate cut expectations ahead of time.

Strategists prefer positions that benefit from a steepening yield curve, including positioning in short-end futures through the SOFR December 2026/December 2027 spread, and adopting a conditional 2-year/10-year bull steepening strategy over a longer duration. If Hassett is confirmed as the next chair, these bets will heat up further.

Bets on a dovish policy shift and an increase in the probability of a rate cut in December pushed the 10-year U.S. Treasury yield close to 4% last week. Later on Tuesday, U.S. Treasuries rose slightly, recovering earlier losses, while the 10-year Treasury yield briefly rose to 4.11%, reaching a nearly two-week high.

Brandywine portfolio manager Jack McIntyre believes that implementing rate cuts while inflation remains above the Fed's target could push long-term Treasury yields higher even as short-end rates decline:

“If Hassett is confirmed, the most likely outcome is bear steepening. I see myself as part of the bond market's security team, and my job is to signal to the government. Do we need to send a signal now? It’s too early to draw conclusions. For me, it’s still a wait-and-see approach ”