As Federal Reserve Chairman Powell's term is set to end in May 2026, rate traders are betting on an unprecedented scale and speed that the Fed will shift quickly to a dovish stance by then and initiate a rate-cutting cycle at the new chairman's first meeting. This expectation is creating significant waves in the futures market and opening a new window of variables for the future direction of the dollar, stock valuations, and gold prices.
Traders Bet Big on 2026 "Swift Dovish Turn"
On Monday, the futures market linked to the Secured Overnight Financing Rate (SOFR) set a record with 108,649 contracts, betting that the Fed will cut rates in June 2026, at the first rate-setting meeting chaired by the new leader. The main trading approach is selling the March 2026 SOFR contract while buying the June one, creating a "calendar spread" strategy.
Data shows this strategy drove an unusually steep price decline in the March 2026 contract, causing its spread with neighboring contracts for December 2025 and June 2026 to rise to the highest levels since January this year. With each basis point representing a $2.7 million risk exposure, the bettors' capital is large, with a clear direction.
Trump's Influence Sparks Expectations, Trading Volume Surges
Traders speculate that whoever Trump nominates to replace the current Fed chairman would likely favor more accommodative policies. While the chairman cannot alone set rate policy, they wield significant influence and signaling power within the Federal Open Market Committee (FOMC).
Steven Barrow, head of G10 strategy at Standard Chartered, notes that Trump might prefer a candidate with a "softer" stance on monetary policy, despite possible resistance in congressional hearings. Gavekal Research analyst Denyer warns that if Trump announces a nominee early, the market might interpret signals from both a "shadow chairman" and Powell for nearly a year, disrupting pricing mechanisms.
Rate Expectations Fall, Dollar under Pressure, Gold and Stocks Might Benefit
In a broader long-term monetary policy outlook, the market has factored in a cumulative rate cut by the Fed of over 150 basis points between 2024 and 2026. This reduction significantly exceeds the expected rate-cut path of other G10 central banks and may intensify the medium to long-term depreciating trend of the dollar.
The dollar index has been trending downward, and if the 2026 rate-cut cycle starts early, it will further weaken the appeal of dollar-denominated assets. Meanwhile, falling rates provide direct support for gold by reducing the opportunity cost of holding non-yielding assets. The gold price has recently approached the key $2,400 threshold, and if expectations strengthen, a new breakout trend might commence.
In the stock market, the Nasdaq and S&P 500 have begun to reflect expectations for more liquidity. The technology and growth sectors could benefit the most, particularly as valuations become more flexible in a lower-rate environment.
The Early Signals of Policy Shift Reflected in Prices
Although Powell's current stance remains cautious and data-driven in policy tempo, the rate futures market has already begun to "bet on the future," laying the groundwork for a major shift that the new chairman might bring. The Fed is about to announce its June rate decision and latest "dot plot" this week, with current expectations showing only a single 25 basis point cut in 2025. Any change to this expectation could become another catalyst for market movements.
For investors, managing this "early policy shift" will become a core question for asset allocation in the coming year. Gold, tech stocks, and emerging market assets might be the first to benefit from the re-pricing of rate expectations.
