Growing number of options traders see no Fed cuts in 2026

TRADERS focused on options are increasingly pricing out expectations for any Federal Reserve interest rate cuts in 2026, making wagers instead that would pay off if the central bank stays on hold all year.

The theme has been in place since at least Friday, when the latest US employment data showed an unexpected drop in the jobless rate. That all but erased the chances of a rate cut at this month’s Fed policy meeting, as measured by market prices, and prompted a growing camp of traders to push back their timing for reductions in the months ahead.

A steadying labour market gives central bankers less reason to keep cutting rates after three quarter-point reductions last year, especially with inflation still running ahead of the Fed’s target. 

“We’ve got a kind of a muddle in the jobs picture, then we’ve got an inflation problem, ” said David Robin, an interest-rate strategist at TJM Institutional Services LLC. “The probability from a data perspective that the Fed will stay on hold at least through March has increased, and as every meeting falls off the calendar, the probability that the Fed stays on hold becomes more likely.”

Even as the swaps market still shows expectations for a half point of cuts in 2026, recent options flow linked to the Secured Overnight Financing Rate, or SOFR, which is closely linked to the Fed’s short-term benchmark, is telling a more hawkish story. 

The bulk of new options positions have been centered around March and June, hedging a scenario of continued delays in the Fed’s next quarter-point move.

Other positions targeting further out the futures strip stand to benefit from a Fed-on-hold stance in 2026, with its target remaining within the current 3.5 to 3.75 per cent band through year-end. 

“Whether the market believes the Fed is on hold or not - whether the probability is 5 per cent, 10 per cent, 20 per cent - these trades are cheap, and if you’re a disciplined risk manager, you want those,” TJM’s Robin said.

Some strategists are coming around to a similar view. Following Friday’s payrolls data, economists and strategists at JPMorgan Chase & Co. said they no longer see a rate cut this year and instead predict a hike in 2027. A month ago, HSBC Securities forecast no Fed rate moves at all through 2027. 

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The shifting sentiment in options comes against a backdrop of heightened tensions between the Trump administration and central bank leadership under Chair Jerome Powell, who on Sunday revealed a Justice Department criminal inquiry against him that he says is politically motivated. 

The move revived concerns around central bank independence, and triggered a backlash among central bankers, investors and lawmakers who came to Powell’s defence. It also has cooled sentiment in the cash market for Treasuries. 

A JPMorgan survey of positioning changes by clients during the week ended Jan 12, showed short positions rising 4 by percentage points and longs increasing by 3 percentage points. The result is the least net longs since October 2024 and the most outright shorts since Oct 6 last year. BLOOMBERG