Wall Street traders increase hedges to guard against the Fed raising rates by less than expected.

September 23: Current interest rate swap pricing shows that the market expects the Federal Reserve to implement three 0.25 percentage point rate hikes by June next year. Some traders are concerned that actual rate hikes may be fewer (a "shallow rate hike cycle"), and are therefore increasing protective positions through SOFR (Secured Overnight Financing Rate)-related options. Over the past week, demand for puts on March 2027 SOFR options has risen significantly, indicating that traders are hedging against the risk of a "less hawkish Fed."

Analysis points out that rising oil prices due to Iran-related conflicts and long-term U.S. Treasury yields breaking above 5% are seen by some as a "tax" on economic growth, which may ultimately limit the Fed's room for rate hikes. And if an economic slowdown is combined with an easing of Middle East tensions, the Fed's eventual number of rate hikes may be fewer than current market pricing.