No matter how much the Federal Reserve will cut interest rates next week, it seems that the interest rate market in the past few weeks is locking in one thing: the Federal Reserve will welcome two large-scale interest rate cuts before the end of January next year.

According to data from the interest rate swap market, the industry's traders have already fully digested the expectation of a interest rate cut by the Federal Reserve next week - but there is only a small possibility (less than 30%) of a 50 basis point cut. However, looking forward to the future, the situation is different.

Recent options activity linked to the secured overnight financing rate (SOFR) shows that traders are increasingly preparing for a cumulative 150 basis point interest rate cut by the Federal Reserve after the January meeting. This is consistent with the current pricing in the swap market.

To achieve such a large scale of easing without emergency interest rate cuts between meetings, Federal Reserve officials must implement a significant 50 basis point interest rate cut in at least two of the four meetings before the end of January.

In fact, just a few weeks ago, traders were betting on a 50 basis point interest rate cut by the Federal Reserve this month due to concerns that the deterioration of the US labor market would force the Federal Reserve to take swift action to address the threat of an economic recession.

Although subsequent data has somewhat alleviated this aggressive dovish bet, many traders still expect the Federal Reserve to take some "big moves" as soon as possible.

In a sense, even if the rate cut next week is ultimately only 25 basis points, it will still be a milestone for the Federal Reserve. This marks the turning point for the decision makers of the Federal Reserve, who have finally shifted from a restrictive monetary policy after more than two years to an accommodative monetary policy.

In the financial market, due to traders consistently reinforcing expectations of a rate cut by the Federal Reserve, US Treasury bonds have recently experienced a continuous rebound and a significant decline in yields.

In the options market, a trade of up to 9 million US dollars appeared as early as Monday, aiming to increase bets on a rate cut by the Federal Reserve until March 2025. Another "premium trade" of 3.5 million US dollars is targeting at least one 50 basis point rate cut by the Federal Reserve at its policy meetings in September or November.

Traders in the Treasury futures market are now starting to cover their short positions and regain their call bets after the non-farm payroll report was announced last Friday. However, if traders hope to lock in profits before and after the Federal Reserve interest rate meeting next week, the aforementioned call positions could still be reversed.

In a report on Tuesday, Citigroup strategist David Bieber wrote, "In the context of our outlook for the FOMC, this is still an environment where bulls are vulnerable to profit-taking."

Editor/Rocky