Wall Street Slashes Expectations for US Fed Interest Rate Cut Overnight! Goldman Sachs: Next Interest Rate Cut Not Expected Until December

Following the joint statement issued by China and the US on Monday to ease trade tensions, major Wall Street banks and traders in the interest rate market have reduced their bets on the US Fed's interest rate cuts within the year, currently pricing in only two rate cuts for 2025, while significantly pushing back the expected window for the next rate cut.

Interest rate swap contracts tracking expectations for US Fed meetings have recently indicated that the US Fed may only cut interest rates by about 55 basis points this year, a further significant decline from the 75 basis points bet on Friday. Traders also expect the first rate cut to occur only in September.

As the market has scaled back its expectations for US Fed rate cuts within the year, the yield on two-year US Treasuries, which is particularly sensitive to monetary policy, climbed by up to 12 basis points on Monday, re-breaking the 4% threshold.

The rise in yields, coupled with decreased certainty about rate cuts, reflects a further weakening of bullish bets in the US Treasury market, as the latest tariff reductions are seen as supportive of the economy. The significant rebound in risk assets, including US stocks, at the beginning of this week, has also diminished the appeal of US Treasuries.

In fact, since the US Fed issued its statement on the May interest rate-setting meeting last week, with Fed Chair Powell advocating a wait-and-see approach to assess how tariffs will affect inflation and economic growth, market bets on US Fed rate cuts have been cooling. Over the past week, the yield on two-year US Treasuries has surged by over 40 basis points from a low of 3.55%, while the yield on five-year US Treasuries has also risen from around 3.85% to 4.11%.

It's worth noting that just last month, the interest rate market had fully priced in expectations for four rate cuts within the year—at that time, the market widely expected the US Fed to restart its easing cycle in June due to concerns that the trade war might crash the US economy.

Ed Al-Hussainy, an interest rate strategist at Columbia Threadneedle Investments, said the market is in an overshoot, and now liquidity is flowing into risk assets. The company prefers to short short-term bonds.

The rapid changes in expectations for US Fed interest rates also demonstrate the huge success of some contrarian bets in the options market earlier. At the end of last month, Cailian Press reported that there were signs indicating that at least one major options trader had wagered a staggering $18 million—betting that the US Fed would not cut interest rates this year. According to the latest data from the Chicago Mercantile Exchange (CME), the number of open interest contracts for related specific put options has exceeded 275,000.

In addition to traders in the interest rate market, many major Wall Street banks have also further pushed back their expectations for the US Fed's rate cut window on Monday.Take Citi economists as an example. After the US announced a significant reduction in tariffs on Chinese goods, they have postponed their expectation for the next interest rate cut window from June to July.

Goldman Sachs, however, has made an even larger adjustment—it postponed the timing of the US Fed's next interest rate cut to December from July on Monday.

In a report, Goldman Sachs strategists stated, "Given these current developments and the significant easing of financial conditions last month, we have raised our forecast for the annualized growth rate of the US economy in Q4 2025 by 0.5 percentage points to 1%, and lowered the probability of a recession occurring in the next 12 months to 35%."

Looking ahead to this week, several US Fed officials, including Fed Chairman Powell, will deliver public speeches one after another. Their views on the direction of interest rates amid the latest developments in the trade situation are undoubtedly worthy of close attention from investors.