Wall Street investors are betting the Federal Reserve will more likely opt for a jumbo interest rate cut over a quarter-point cut, according to the latest data.
Futures on the Fed funds rate, which measures the cost of unsecured overnight loans between banks, have priced in a 61% chance of a 50 basis-point rate cut by the central bankers Wednesday.
That’s up from 45% last Friday for the bigger rate cut and from just 25% a few days prior following worse-than-expected inflation data from the latest Consumer Price Index report.
The Fed will hold a two-day policy meeting starting on Tuesday and is widely expected to reduce the benchmark overnight interest rate currently in the 5.25% to 5.50% range.
The rate reduction, however, has turned into a coin flip between 50 and 25 bps over the last few days.
Prior to last Friday, it seemed a half-point cut was off the table. On Sept. 9, the odds of a quarter-point cut were 70% while the odds of a half-point cut were just 30%, according to CME FedWatch.
Core CPI data and core wholesale prices – two inflation measures which exclude volatile food and energy prices – released last week rose above expectations, further dampening hopes for a half-point cut.
But traders hiked their bets on Friday that the Fed would slash rates by a half point after The Wall Street Journal reported that bankers have become more focused on the job market instead of inflation and former New York Fed President Bill Dudley argued in favor of a half-point cut.
In a Bloomberg opinion piece, Dudley said the Fed’s focus on price stability and maximum employment has become more stabilized, so monetary policy should be neutral – not overly corrective.
“Yet short-term interest rates remain far above neutral. This disparity needs to be corrected as quickly as possible,” Dudley wrote.
Boris Kovacevic, global macro strategist at Convera in Vienna, said the size of the Fed’s rate cut is not so significant “given the long lag and transmission mechanism, but it does matter in terms of how they want to be perceived.”
“If they go 50, there is a chance that the Fed has some information that investors don’t have and that recession risks are more likely than currently anticipated and priced in,” Kovacevic said.
The Fed’s aggressive post-pandemic interest rate hikes in 2022 and 2023 dampened demand, which stunted hiring and led to a labor market slowdown.
Though economists had forecast the US would face a recession after the series of rate hikes, easing inflation has spurred hopes that the Fed will be able to deliver a soft landing.
With Post wires