"Shadow Chairman" effect emerges? Traders are heavily betting that the Federal Reserve will quickly cut interest rates after Powell leaves office.

American interest rate traders are betting that after the end of current Federal Reserve Chairman Powell's term in May 2026, the Fed will quickly shift to a more dovish monetary policy. The core assumption of this bet is that after President Trump appoints Powell's successor, the new Fed chairman will start cutting interest rates at the first monetary policy meeting after taking office (expected in June 2026). Futures trading volume related to this bet hit a historical record on Monday and continued to expand on Tuesday. Although Trump has been urging Powell to cut rates in recent months, Fed officials have repeatedly stated that they are still watching the impact of tariffs on the economy and inflation. The market widely expects the Fed to keep rates unchanged at Wednesday's meeting and may lower expectations for rate cuts this year to address upward pressure on prices caused by tariffs. On Wednesday, investors will be watching the latest dot plot from the Fed. The market widely expects Fed officials to forecast one rate cut (25 basis points) in 2025, compared to the median of two rate cuts in the forecast released in March. Currently, traders are betting that the Federal Open Market Committee (FOMC) will cut rates by a total of about 43 basis points by the end of the year, possibly as early as a 25 basis point cut in September, but more likely in October. Traders' bets are concentrated in the futures market linked to the Secured Overnight Financing Rate (SOFR). SOFR, as an important tool to measure Fed policy expectations, quickly attracted traders' attention after Trump announced earlier this month that he would "soon" announce the next Fed chairman. Bets on interest rate futures include shorting the SOFR futures contract expiring in March 2026 while taking a long position on the SOFR futures contract expiring in June 2026. This is a typical "three-month interest differential trade" that has caused a certain disruption in the futures market from the end of 2025 to the first half of 2026. Due to substantial selling of the March contract, its relative price compared to the December 2025 and June 2026 contracts weakened significantly, leading to a surge in the relative price spread of the March 2026 futures to the highest level since January. According to statistics, the trade had a trading volume of 108,649 contracts on Monday. Open positions in the March and June contracts also rose to the highest level of the current policy cycle, reflecting strong demand for this strategy to some extent. However, as most futures trading is anonymous, it is still difficult to determine the specific institutions or trading details involved. Steven Barrow, G10 strategist at Standard Bank, pointed out in a report that "Trump may choose a successor who clearly supports loose monetary policy, although this may make the confirmation process in Congress more difficult." Will Denyer and other economists at Gavekal Research also warned that if Trump were to nominate the next Federal Reserve Chairman early, it could create a situation where a "shadow" Fed Chairman exists for up to a year, forcing investors to pay attention to both Powell and the statements of the new nominee. This confusion of voices could further undermine market confidence in US policy-making. It should be noted that the Fed's monetary policy is collectively decided by the Federal Open Market Committee, and the Fed chairman does not unilaterally set policy rates.