Reverse the bet: The next move of the Federal Reserve is to raise interest rates rather than cut them.

The next move by the Federal Reserve will be a rate hike, not a rate cut, marking the most optimistic and most elusive bet among a group of stubborn bond traders. This bet emerged after the release of strong non-farm payroll data on January 10, sharply contrasting with Wall Street's consensus that the Fed will cut rates at least once this year. Despite the strengthening of the Fed's rate cut stance with the release of US December CPI data last Wednesday, leading to a fall in US bond yields from multi-year highs, this contrarian bet still exists. According to an analysis as of the end of last Friday, based on options related to the overnight financing rate, traders currently believe there is a 25% chance of the Fed raising rates by the end of the year. Before the release of US December CPI data, this probability was as high as 30%. Just over a week ago, the possibility of the Fed raising rates this year wasn't even considered 60% of options traders were betting on the Fed cutting rates further, while an additional 40% were betting on the Fed pausing rate cuts. Just like many things in the financial markets today, this is actually a bet on the policies that President Trump is about to implement. It depends on the view that the tariffs and other policies implemented by the new administration will trigger an inflation rebound, forcing the Fed into an awkward pivot. Former New York Fed economist Phil Suttle expects the Fed to raise rates in September. He predicts that Trump's proposed tariffs and restrictions on immigration will push up inflation. He also added that the US has started to see wage levels rise again. Phil Suttle's view is still extreme. Bond traders have fully priced in the expectation of a 25 basis point rate cut by the Fed this year. They also believe there is a 50% chance the Fed will cut rates again. However, Roger Hallam, Global Rates Manager at Vanguard, stated: "If there is a significant unexpected increase in inflation in the coming months, the market may start to consider the possibility of a rate hike this year." After the rate decision in December last year, Fed Chair Powell told reporters that the Fed does not want inflation to exceed its 2% target. When asked if this meant they couldn't rule out the possibility of a rate hike in 2025, Powell said, "In this world, you can't completely rule out anything." But he also added that a rate hike "seems unlikely." Although the threshold for a rate hike is high, the Fed has changed course quickly in the past. In 1998, the Fed rapidly cut rates three times in a row to contain the financial crisis caused by the Russian debt default and the near-collapse of the hedge fund Long Term Capital Management. The Fed then started raising rates in June 1999 to curb inflation pressures. Chief Investment Officer at Garda Capital Partners, Tim Magnusson, said, "The market needs a true rebound in inflation - like overall CPI reaching around 3% - to meaningfully price in a rate hike." "I think the Fed sitting on the sidelines for a while is comfortable." Benson Durham, Global Asset Allocation Director at Piper Sandler and former Fed economist, believes that the pricing of options in the money market suggests there is close to a 10% chance of at least one rate hike this year. He said, "Overall, the market's view on the risks of a rate hike or rate cut seems quite balanced."