As we move into the second half of the year, the Warsh Fed is under scrutiny to define its long-term trajectory. While the Trump administration continues to push for a significant reduction in the cost of capital to stimulate “AI-driven industrial growth,” the Committee is grappling with a stubborn 3.0%+ headline inflation rate.
The debate has shifted from “if” the Fed will cut, to “how many” total moves are feasible without reigniting a price spiral. Currently, the market is pricing a base case of two to three cuts for 2026, a sharp contrast to the more aggressive easing hopes seen at the start of the year.
Contracts are highly sensitive to the quarterly Summary of Economic Projections (SEP) and the evolution of the Board of Peace trade policies, which many fear could be inflationary. With Jerome Powell’s departure now in the rearview, the June and September meetings are seen as the primary windows for any structural shifts in the federal funds rate.
Resolution
The contract settles based on the total number of distinct target range reductions, e.g., 25bps or 50bps increments, officially announced by the FOMC between January 1, 2026, and December 31, 2026.
Market Dynamics
Volatility is currently clustered around the “2 Cuts” vs. “3 Cuts” outcomes. Odds for a “Zero Cut” year have crept up following hawkish commentary regarding fiscal deficit spending. Traders are monitoring the 2-year/10-year Treasury yield curve for signs of a policy error if the Fed remains too restrictive.
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Trading Edge
This market requires a macro view of the entire year. While political pressure is a significant factor, the “dot plot” remains the anchor. Experienced traders are currently using “1 Cut” contracts as a tail-risk hedge against a potential late-year inflation spike, while the bulk of institutional volume is parked in the “2-3 Cuts” range. Watch for any shift in the neutral rate estimates in the June SEP, as a higher neutral rate would structurally cap the total number of possible cuts.
