The Federal Open Market Committee’s meeting minutes are set for release at 2pm New York time, with market expectations leaning towards dovish comments from Powell. Currently, the market anticipates 125 basis points in rate cuts over the next 12 months.
This perception contrasts with the Fed’s recent statements regarding their hesitation to cut rates until they have clearer information about inflation. A 40% probability of a rate cut at the May 7 meeting and expected reductions in June complicate Powell’s situation, as he may risk appearing hawkish if he does not address these expectations.
Fed’s Stance and Inflation Concerns
The Fed’s current stance is viewed as modestly restrictive, which raises questions about the appropriateness of dovish remarks, especially with tariffs potentially impacting inflation levels.
In simple terms, the article outlines a mismatch between what traders think the Federal Reserve might do with interest rates and what the Fed has said it intends to do. Markets appear to be pricing in a fair amount of rate cuts this year—specifically, 125 basis points worth—based largely on the belief that Powell will be inclined to express cautious or “dovish” views in upcoming remarks. However, this optimism may run ahead of actual policy thinking. The Fed, going by its most recent comments, appears reluctant to ease rates unless it receives stronger confirmation that inflation is falling in a steady and controlled manner.
At the same time, short-term traders are factoring in a potential rate cut as early as May, with even more confidence placed on a move by June. This creates an uneasy backdrop for Powell, who risks sounding out of step with markets if he fails to acknowledge these shifting expectations. On the other hand, if he leans too far into saying that rate cuts aren’t likely soon, he may give off the impression of being overly cautious—or “hawkish”—which might tighten financial conditions further.
The Fed’s existing position, described as modestly restrictive, suggests that the cost of borrowing is high enough to slow certain parts of the economy. That’s why markets are watching closely for any sign that the Fed will shift away from this stance. The situation is further clouded by tariff concerns, which could feed into price increases, reinforcing inflation risks and making cuts tougher to justify in public or in policy.
Market Dynamics and Policy Implications
From our seat in the exchange, we need to understand that pricing ahead of the minutes’ release increasingly resembles one-sided positioning. Volatility remains underpriced across mid-curve expiries. That’s something to note if you’re considering exposure into the mid-month roll. The odds being assigned to a May or June adjustment are not trivial. If the minutes fail to validate those expectations—or even cast slight doubt—front-end rate bets could unwind quickly. At current vol levels, options offer relatively cheap entries to engage directional views without overstretching delta.
Consider the pricing on call spreads a few months out. They stand far better value than what we’ve seen in recent cycles given implieds remain suppressed. A flattening bias in the dot plot or reference to external risks not materialising may revive rate re-pricing in one sharp move, particularly if inflation remains firm. Recall how quickly market assumptions changed in early 2023 post-CPI upside surprise. That’s the kind of anchoring that might be at risk again.
Also notable: risk reversals currently lean to the downside in eurodollars and SOFRs. That tells us put demand remains steady. If Powell avoids giving reassurance that easing is within reach, we could see broader spread widening across that curve. And that’s where steepeners start to underperform. It’s better to avoid fresh build-up in those positions without clearer confirmation from the Fed.
Watch positioning into the minutes. Options expiry and CME’s quarterly roll are not far off. Temporary dislocations in gamma supply are likely and may exaggerate brief moves. We prefer keeping duration light around the release and selectively stepping into longer vol, but only as part of staggered structures with limited downside.
The tariff note, tucked into the tail, should not be ignored either. It’s a subtle yet direct flag that policy decisions are facing more than just domestic inflation data. Supply chain tensions and pass-through pricing effects are one layer markets aren’t fully reflecting yet. These are the types of risks that make policymakers hold back.
We suggest focusing less on broad trends and more on what the Fed chooses to say about timing. That will set the tone—not just rate direction, but curve dynamics and relative pricing between forwards and swaps. Opportunities will likely emerge where sentiment runs ahead of the text. Let’s be ready for that.
