Bond traders are increasing bets that the Federal Reserve will cut interest rates by 50 basis points in September, rather than the standard 25 basis points.
That was evident in the fed funds futures market, where softer-than-expected CPI inflation data Thursday morning triggered a wave of buying for October contracts that continued on Friday. Those contracts, which expire on Oct. 31, are fully priced in for a quarter-point rate cut at policymakers’ Sept. 18 meeting.
Futures open interest data from CME Group Inc. showed buying on Thursday sparked fresh risk, with volume just under 260,000 contracts, a record for October contracts. Buying interest remained high on Friday.
Bets on a 50 basis point rate cut hit record high for October Fed funds futures contracts
Any buying at higher levels implies an expectation that more people will believe that the Federal Reserve may begin its first easing cycle in years with an outsized move.
“There’s a very good chance that the Fed will cut rates in September,” Marilyn Watson, BlackRock Inc.’s global head of fundamental fixed-income strategy, said on Bloomberg TV. While she expects the Fed to cut by 25 basis points, she said: “We think they’ll probably start in July. We know that the Fed has been very, very data dependent.”
The positions would also benefit if expectations grow for a quarter-point rate cut on both July 31 and Sept. 18, but traders gave up hopes for a July cut weeks ago and no major Wall Street bank is forecasting one.
Market expectations for Federal Reserve policy changed little on Friday as a stronger-than-expected producer price (PPI) report had little impact compared to Thursday's weak CPI report.
The swap contracts, whose settlement value is determined by the Fed’s policy decisions, fully price in a 25 basis point rate cut in September and a total of 60 basis points by the end of the year, implying two 25 basis point cuts and a 40 percent chance of a third.
Fed sends clearest signal yet of upcoming rate cut
Last week, Federal Reserve officials were seen as sending their strongest signal yet that they were preparing to cut interest rates. In public appearances last week, including two congressional testimony by Fed Chairman Jerome Powell, officials expressed new confidence in their control over inflation and whether they were ready to begin a policy shift.
Their confidence has been bolstered by better-than-expected economic data, which last week confirmed continued downward pressure on consumer prices. At the same time, there has been weakness in the labor market. Separately, U.S. banks have warned that low-income customers are showing signs of financial stress after a long period of high prices. While policymakers have not specified when and by how much they will cut rates, their rhetoric makes it clear that a new era is dawning.
Pimco economist Tiffany Wilding said that after the release of last week's data, a rate cut in September is "a done deal."
Chicago Fed President Goolsbee told the Financial Times on Friday that it had been “a good week” for a central bank working to lower inflation without triggering a US recession. Powell told lawmakers that the Fed did not have to focus primarily on inflation because the central bank had made “considerable progress” in curbing price pressures and the labor market showed clear signs of cooling. Instead, the Fed faces “two-sided risks” and must be more aware that if it continues to hit the world’s largest economy with high interest rates, it will inadvertently create too much unemployment. San Francisco Fed President Mary Daly, a 2024 voter, told reporters last week that a rate cut was “reasonable.”
The article is forwarded from: Jinshi Data