Traders Scrap Bets on November Fed Move as Historic Short Cracks

A massive wager that the Federal Reserve would raise interest rates again in November is in full-blown collapse.

(Bloomberg) — A massive wager that the Federal Reserve would raise interest rates again in November is in full-blown collapse.  

A record amount of risk had accumulated in CME Group Inc.’s federal funds futures contract for November in recent weeks, driven by interest in short positions that would benefit from a rate hike by the central bank on Nov. 1. The contract is used to wager on monthly average levels of the interest rate the US central bank sets a target range for. Open interest, the number of contracts in which traders had positions, reached 771,500 on Oct. 17, equivalent to $32 million per basis-point move in its price. 

Bond Traders Wager Historic Sums on November Fed Meeting Outcome

That figure slumped by 63,000, about 8%, over the past two days to 708,000, including a decline of 46,000 on Thursday, equivalent to about $2 million per basis point. The unwind went into apparent hyper-drive in US trading Friday, as more than 100,000 November contracts were bought in the span of a minute. 

The unwind kicked off Wednesday after Fed Governor Christopher Waller said the central bank “can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate.” It accelerated following Fed Chair Jerome Powell’s appearance Thursday at the Economic Club of New York, where he appeared to favor a November pause. 

It’s not just traders that are switching up their positions for the November meeting. Economists at Barclays Plc and Bank of America Corp. changed their forecasts to December this week, and even that is “a close call,” with “meaningful risks that the Fed will either delay the last hike into 2024 or not hike again,” the Bank of America team led by Michael Gapen wrote in a note dated Friday.

Barclays change is based on “recent FOMC communication arguing for a pause” on Nov. 1, “despite the stronger-than-expected labor market, activity and CPI inflation data,” team led by Marc Giannoni wrote in an Oct. 18 report.  

Fed swaps currently price in just 2 basis point of rate-hike premium for the November policy meeting, down from 4 basis points at the start of the week. 

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