Traders in U.S. futures and options markets are increasing bets that the Federal Reserve will not only continue cutting interest rates this year but may extend the easing cycle into next year, rather than resuming hikes in 2027 as previously anticipated. Spreads on futures tied to the Secured Overnight Financing Rate (SOFR), which closely reflect market expectations for the Fed's policy path, are showing significant inversion. This suggests traders are pricing in a more prolonged period of monetary easing. Until recently, markets had expected the Fed to deliver two 25-basis-point rate cuts by year-end before returning to rate hikes in 2027. However, growing discussion around the impact of artificial intelligence on the labor market has prompted traders to reassess this outlook. On Tuesday, Federal Reserve Governor Lisa Cook warned that if widespread adoption of AI leads to higher unemployment, the central bank may not be able to fully cushion the economic impact. SOFR options markets are also signaling a dovish tilt. Related trades are leaning toward hedging the possibility of multiple rate cuts this year, with notable increases in open interest for certain contracts, such as December call options with a strike price of 98.00. Since last weekend, the flattening trend in SOFR spreads has accelerated noticeably. At the same time, concerns over AI's disruptive potential have weighed on certain equities and boosted long-term U.S. Treasury prices. Jack McIntyre, portfolio manager at Brandywine Global Investment Management, commented: The key question is whether AI will ultimately generate inflationary pressures—something the long end of the yield curve may already be anticipating. The only potentially inflationary aspect of AI relates to data center construction and associated energy demands, which is already factored into market expectations.