(Bloomberg) — Traders are reducing their expectations for how much the Federal Reserve will cut interest rates in the months ahead, a shift that illustrates how mixed messaging from central bank officials has clouded expectations for monetary policy.

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Options linked to the Secured Overnight Financing Rate show market participants betting on a scenario that sees just one more 25 basis point rate cut in 2025 and a so-called neutral rate — the sweet spot at which policy neither stimulates nor restrains growth — higher than current market expectations. That’s a sharp contrast with last week, when wagers on a 50 basis point rate cut by year-end were in demand.

A wider range of monetary policy views from Fed officials in recent weeks has helped drive that swing, with traders rushing to hedge scenarios where the central bank delivers hefty rate cuts and others in which it is less aggressive.

Newly appointed member Stephen Miran, for example, this week said policy remains too tight and made the case for 125 basis points in rate cuts at the two remaining FOMC meetings in 2025, while Atlanta President Raphael Bostic said on Tuesday that the Fed needs to stay on guard against inflation.

Fed Chairman Jerome Powell, meanwhile, said in a Tuesday speech that the outlooks for the labor market and inflation both face risks and offered no hints on whether he might support a rate cut at the Fed’s next meeting in October.

“Comments over the past couple of days have really just reinforced the large split apparent in the dot plot,” said John Canavan, an analyst at Oxford Economics, referring to the chart showing policymakers’ estimates of where the federal funds rate should go in coming years.

The FOMC last week reduced the policy rate to a range of 4% to 4.25% in its first cut of the year.

The days following that meeting saw an influx of trades targeting less than the roughly two 25 basis point moves currently priced into the swaps market. Further out in time, there has also been demand for options that imply a neutral rate closer to 3%.

Interest-rate swaps are currently pricing in a neutral rate of around 2.95% and a combined amount of roughly 40 basis points of rate cuts over the remaining two scheduled meetings for this year.

The moves helped push US 10-year yields up to near a three-week high earlier this week, though they have since retreated and traded steady at 4.11% at 8:45 a.m. in London.

Here’s a rundown of the latest positioning indicators across the rates market:

JPMorgan Treasury Client Survey

In the week to Sept. 22, investor short positions rose 4 percentage points to the most since the start of February in the all-client survey. Long positions also rose over the week, as neutrals dropped 7 percentage points.

Most Active SOFR Options

In SOFR options, across Dec25, Mar26 and Jun26 there has been a large amount of new risk added to Z5 96.50 calls and Z5 95.875 puts over the past week. Recent flows have included outright buying in the 96.50 calls at 2.75, along with call condor positions such as SFRZ5 96.1875/96.3125/96.50/96.625 call condors and SFRZ5 96.25/96.375/96.50/96.625 call condors. There has also been large outright buying in Z5 95.875 puts over recent sessions including 35k between 0.25 and 0.5. The past week has also seen heavy liquidation in Z5 95.625 calls.

In SOFR options across Dec25, Mar26 and Jun26 tenors, the 96.50 strike is the most populated and has seen heavy activity over the past week via Dec25 calls, where most of the open interest now sits. The strike has been heavily used in recent trades to target half-point rate cuts at one of the remaining Fed meetings this year.

Treasury options skew continues to trade around neutral across the curve, with the long-end recently flipping from favoring put premium a couple of weeks ago. Recent options flow in Treasuries has included a $50 million premium, 100,000 options position which traded on Monday — targeting a 3.95% 10-year yield via December calls.

In the week ending Sept. 16 CFTC data showed asset-manager net long position in long-bond futures unwound at a rapid pace, while hedge funds covered shorts in 5-year note futures. Asset managers also extended net long in ultra-long bond futures over the week.

—With assistance from Michael MacKenzie.

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