Markets expect the Federal Reserve to hold rates steady in January, and the options market is increasing its bets on the Fed remaining on hold for the entire year.

According to Mars Finance, on January 14th, a growing number of options traders are eliminating expectations of a Federal Reserve rate cut in 2026 and instead betting that the Fed will keep rates unchanged throughout the year. This trend can be traced back to at least last Friday, when US employment data showed an unexpected drop in the unemployment rate. Market pricing suggests this virtually eliminated the possibility of a Fed rate cut this month, prompting more traders to postpone their expectations for rate cuts in the coming months. David Robin, interest rate strategist at TJM Institutional Services, noted, "From a data perspective, the probability that the Fed will keep rates unchanged until at least March has increased, and the likelihood of stable rates increases with each meeting." Recent options flows for the covered overnight funding rate, which is closely linked to the Fed's short-term benchmark rate, have sent a more hawkish signal. New options positions are mainly concentrated in March and June contracts to hedge against the scenario of a continued delay in the Fed's next rate cut. Other positions targeting longer-term contracts are expected to profit from the Fed's stance of keeping rates unchanged throughout the year. Robin stated that regardless of whether the market believes the Fed will hold rates steady, these trades are low-cost, and as a prudent risk manager, you would want to hold these types of positions. (Jinshi)