Bond traders are using options to amplify their bets that the Federal Reserve will deliver at least one 0.5 percentage point rate cut during the final three monetary policy meetings of this year.

The Fed is expected to announce its first borrowing cost reduction since the beginning of the year this Wednesday, with a 25 basis point cut being the most likely decision. However, cooling labor market conditions have prompted some traders to hedge against the risk of more aggressive action in the coming months should economic prospects deteriorate further, despite inflation remaining elevated.

Trading dynamics linked to the Secured Overnight Financing Rate (SOFR) this week indicate rising demand for December options, which will expire two days after the Fed announces its policy decision on December 10.

These bets would benefit if the Fed's September, October, and December meetings result in up to two 0.5 percentage point cuts, or three 0.25 percentage point reductions. These trades reflect a more dovish interest rate path than currently priced in swap markets, which are pricing in approximately 70 basis points of total cuts across the three meetings.

Of course, betting on larger rate cuts carries the risk that Fed Chair Jerome Powell signals a more cautious approach this Wednesday, particularly given the uncertain ultimate impact of tariffs on consumer prices.

Economists noted in a report that given weak employment growth, they expect the Fed to deliver a "catch-up" 0.5 percentage point cut this week. However, they indicated that "Powell is unlikely to be explicit about further easing measures," as officials remain divided on subsequent moves.

There are signs that futures market traders are hedging against an unexpectedly dovish scenario this week. Monday saw the largest block trade in federal funds futures market history, totaling 84,000 contracts, suggesting positioning for the possibility of a 0.5 percentage point cut on Wednesday.

Traders' increased bets on Fed dovishness may also factor in pressure from the White House. President Donald Trump has repeatedly criticized Powell for being too slow on rate cuts. At this meeting, his economic advisor Stephen Miran, who was just appointed as a Fed board member, will also participate.