What is the concept of the Fed cutting interest rates to 2% by the end of next year?

The answer is that if the current interest rate market is correct in pricing interest rates above 5% in the middle of next year, the Fed will hold four interest rate meetings in the second half of next year.You need to cut interest rates by 300 basis points in total-75 basis points for each meeting.

This is not empty talk on paper, but a "big gamble" under real money!

On Friday, industry insiders noticed that someone had bought a series of guaranteed overnight financing rate (SOFR) futures and options expiring in September 2023, betting that the Fed would move sharply to 2 per cent in September next year!

By this week, similar bets have not stopped, but have become more. Traders have poured into positions that could benefit from the Fed's sharp turn in monetary policy. These transactions involve SOFR futures and options with maturities of more than two years after next year.The most active of these trades is the bullish spread structure with strike prices at 97.00 and 98.00, corresponding to policy interest rates of 3% and 2%, respectively.

Compared with the madness of the options market, Wall Street investment banks are particularly "conservative".

While many investment bankers also support the Fed's rate cut in the second half of next year, the boldest UBS also "only" expects the Fed to cut interest rates by 175 basis points, well below the aggressive 300 basis points in the options market.

Nomura has the highest forecast for peak interest rates, and the Fed's need to fight high inflation is expected to force the benchmark interest rate to rise to 5.75 per cent by May next year, the highest level since 2001, before the Fed will cut rates by 75 basis points in the second half of next year.