Betting on interest rate cuts to make money, traders continue to bet on the Fed's emergency rate cut! Legendary figure speaks out

In July, traders who boldly bet on the possibility of the Federal Reserve implementing a large-scale interest rate cut were once considered unrealistic, but now the market is experiencing significant fluctuations in the direction they are betting on, and their trades will earn huge profits.

In just a few days, the market has undergone a major shift, with the market now pricing in a 50 basis point rate cut at the next Fed policy meeting. Other activities in the federal funds futures market also indicate that traders are starting to bet on an emergency rate cut action between scheduled meetings.

"Investor sentiment has clearly shifted towards economic anxiety rather than optimism." Ian Lyngen, head of rate strategy at BMO Capital Markets, wrote in a memo on Monday.

Traders who entered the market before the sentiment shift, when futures contract prices were relatively low, are now making significant profits, assuming they have not cashed out, with the potential for multiple returns on their investments in the future.

Just a few weeks ago, federal funds futures were pricing in a routine 25 basis point rate cut at the next Fed policy meeting, as people believed that gradual policy easing would be enough to keep the economy on the right track.

Now, that framework has been shattered as data shows slowing growth in U.S. job growth and other key areas, sparking concerns that the Fed may keep rates too high for too long, increasing the risk of an economic downturn.

In a profitable bet involving October federal funds futures, someone established 50,000 futures positions at a price level of 94.920 on July 12. According to Bloomberg analysis, the contract reached a high of 95.325 in Monday's trading, indicating a profit of about 40.5 basis points, or approximately $85 million.

Traders have not shown signs of exiting, continuing to use funds to bet on aggressive easing strategies. Last Friday, trading volume for the October 31 federal funds contract hit a record high of nearly 400,000 contracts, well above the 13.2-day moving average.

Economists at Citigroup have revised their forecasts for the Fed, now expecting rate cuts of 50 basis points at the September and November policy meetings, and a 25 basis point cut in December. After Citigroup announced the new forecast, buying in federal funds futures increased again, with someone buying 18,000 contracts at a price of 95.115, nearly 20 basis points higher than the July trading price.

Meanwhile, traders continue to accumulate long positions in U.S. Treasuries, with open interest in 10-year Treasury futures contracts rising for the ninth consecutive day last Friday.

Legendary Market Observer Predicts Unexpected Rate Cut by the Fed

The aggressive rate cut bets have received support from legendary market observers. Renowned financial analyst and writer Robert Prechter responded to the massive market sell-off, believing that the Fed will make an emergency rate cut before the September meeting to address the significant sell-off in global markets on Monday Prechter is the founder and president of Elliott Wave International, and the author of "The Socionomic Theory of Finance".

He said on Fox Business Channel that he expects the Federal Reserve to take unconventional interest rate cuts between meetings after missing the opportunity to cut rates at the official meeting last week. He talked about the dangers of extreme market optimism, stating that the optimistic sentiment is now deeply rooted, and we are witnessing the "most over-inflated market in history". He said, "Last week, the Federal Reserve had a great opportunity to cut the federal funds rate by 25 basis points, but they didn't take it. I think this is a big mistake."

He mentioned that the average lag time for central banks to follow market rates is five months, and despite the 3-month US Treasury yield dropping below 5.2% from 5.5%, the Federal Reserve still decided to follow the usual lag time. He reiterated, "So, they did have a great opportunity to lower the federal funds rate, and they didn't take it. I think there will be an unexpected rate cut before the September meeting, as I believe rates are starting to fall faster now."

Emergency rate cuts by the Federal Reserve are very unusual. The last time such a measure was taken was during the peak of the COVID-19 pandemic, when there were concerns about a global economic collapse. Monday's massive sell-off sparked discussions about a possible emergency rate cut, but many economists believe that an emergency rate cut is highly unlikely, as it would indicate a poor economic situation in the US and globally, and would also suggest a major mistake by the Federal Reserve, further scaring off investors