By GERTRUDE CHAVEZ- DREYFUSS
NEW YORK — – US rate futures are pricing in a quicker pace of monetary easing over the next two years than the Federal Reserve penciled in last week in its latest projections, a view cemented after US military strikes on Iran introduced another threat to economic growth.
Traders in futures tracking the Secured Overnight Financing Rate (SOFR), a measure of the cost of borrowing cash overnight, are betting the Fed in 2026 will cut rates more than it anticipated in economic projections released at the close of the central bank’s policy meeting last Wednesday.
On Monday, traders’ SOFR bets had pushed the implied yield of futures contracts maturing in December 2026 SRAZ26 65 basis points (bps) below those expiring in December 2025 SRAZ25, a record low and the most negative that spread has ever been, suggesting market expectations of more rate cuts. This likely reflects a view that the US economy could hit a deeper slowdown than expected, analysts said.
The trade is used by investors in carry strategies, and while not predictive, it reflects where the market thinks interest rates are headed. The SOFR rate is currently 4.29 percent.
“I do think it’s definitely an expectation of slowing growth having an impact on Fed policy next year,” said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte.
“Slowing growth prospects and the effect of all the fiscal and geopolitical uncertainty coming to fruition in 2026…could drive the Fed to ease more.”
The rate cuts being priced in SOFR futures are a little more aggressive than the Fed’s rate outlook under its so-called “dot plot.” The dots show policymakers see rates being reduced by 25 basis points twice this year, from the current target range of 4.25 percent-4.50 percent, and only once each in 2026 and 2027.
Market expectations of a steeper rate cut path come even as investors worry that the US attack on Iran’s nuclear sites on Saturday could send oil prices LCOc1 much higher, increasing the risk of inflation and further cementing the Fed’s wait-and-see stance. Oil prices initially spiked to their highest since January, before paring gains.
But Seth Carpenter, global chief economist at Morgan Stanley, said the supposed pass-through of oil prices is quite modest, at 10 percent, which historically moves core inflation by only a couple of basis points.
“Even if the national income implications are close to a wash, the distributional effects imply softer consumer spending and thus growth,” Carpenter wrote in a research note on Sunday. “Higher oil prices feel inflationary, but they could ultimately mean downside risk for the Fed.”
