Will the Fed cut rates by July 2026?

Recent SEP dot plot showed the median FOMC member projecting two cuts by year-end, with several committee members openly discussing the possibility of front-loading the easing cycle.^¹ May CPI print at 2.4% year-over-year came in cooler than the 2.5% consensus,^² marking the third consecutive month of disinflation.

Implied probability on Polymarket is currently 53%. We read the market as underpricing the cooling-inflation trajectory by 7-12 points for three reasons:

First, the labor market data released last week showed the strongest unemployment-rate increase in 18 months — historically a leading indicator for Fed accommodation. Second, futures markets are pricing in a 71% probability of a July cut versus Polymarket's 53%,^³ suggesting a meaningful arb between sophisticated rate-trader expectations and the prediction market consensus. Third, even if the Fed delays one meeting, the July contract resolves YES if a cut lands on any meeting through July 31 — including the unscheduled possibility of inter-meeting action if markets stress.

The asymmetric risk reward (40% downside if the Fed delays to September, 60% upside if they cut as priced by rates futures) supports a partial Kelly position at 4% of bankroll.