Close your positions before the Fed decision! Some people have made tens of millions of dollars betting on the Fed's difficulty in cutting interest rates…

Caixin 3/17 News (Editor: Xiao Xiang) Since the beginning of this month, the surge in oil prices and the market’s significant cooling on expectations of the Federal Reserve’s easing policy have resulted in a $10 million profit from a short-term interest rate options bet.

This trade was initiated in January on options linked to the Secured Overnight Financing Rate (SOFR), which is closely related to the Fed’s policy path. The latest open interest data released by CME on Monday (covering last Friday’s trading) shows that the sell-off of related options contracts over the weekend aligns with the profitable closing of this position.

Most of these contracts are traded anonymously, making it difficult to identify the involved institutions and the specific beneficiaries of the bet. However, the success of this bet has still been widely discussed within the industry.

Data indicates that this position was established long before the recent Middle East conflict erupted, with the aim of betting that the Federal Reserve’s interest rate by mid-2028 would be higher than the market’s main expectations in January.

As geopolitical tensions pushed oil prices to their highest levels since 2022, sparking inflation concerns and leading traders to expect the Fed to keep interest rates high for a longer period, this position turned profitable last week.

The shift in interest rate expectations favored this bet because the subsequent sell-off in SOFR futures drove up the prices of related put options—put options give holders the right, but not the obligation, to sell the underlying asset at the strike price.

Currently, traders in the futures market only expect the Fed to cut interest rates by about 25 basis points before the end of this year, whereas in late February, market pricing had at least two 25-basis-point rate cuts expected.

Additionally, traders have priced in higher long-term interest rates—SOFR futures for June 2028 are now about 30 basis points higher than levels seen in early March.

The profit-taking on this options position comes just ahead of the Fed’s decision on Wednesday. The market widely expects the Fed to keep rates unchanged at this week’s meeting. However, given the turbulent international situation, the importance of this Fed decision will be self-evident.

Traders will closely watch Fed Chair Powell’s press conference for the latest views on the surge in energy prices and how the Fed plans to balance the softening labor market. This quarterly rate decision will also release the highly anticipated dot plot, which is expected to provide key clues about the Fed’s interest rate trajectory over the coming years.