Thirty-day federal funds rate futures show a sharp increase in the likelihood that the Federal Reserve will cut interest rates by 50 basis points in September, according to the Chicago Mercantile Exchange's FedWatch tool.
This may be related to the recent calls for the Federal Reserve to cut interest rates as soon as possible. On Wednesday, it was reported that former New York Fed President Bill Dudley called on the Federal Reserve to cut interest rates as soon as next week amid concerns about a recession, reversing his long-standing view that the Federal Reserve should stick to a "higher and longer" interest rate policy.
The data showed that the probability of a 50 basis point cut in the target rate to 4.75-5.00% at the meeting scheduled for September 18, 2024 has risen to 22.3%. This is a sharp increase from the 10.7% probability the day before, and in sharp contrast to the 3% probability last week.
On the other hand, the probability that the Fed will cut its target interest rate by 25 basis points to 5.00-5.25% has dropped to 76.2%. This is a significant drop from the 89.1% probability recorded the day before, and a significant drop from the 95% probability recorded last week.
Even a 75 basis point rate cut in September is becoming more likely. The probability of the Fed lowering its target rate to 4.50-4.75% rose to 1.5% from 0.3% in the previous session and zero last week.
These changes in odds suggest that trader sentiment is shifting. The increase in the odds of a cut to the target rate of 4.75-5.00% is particularly noteworthy because it suggests growing expectations for a 50 basis point rate cut at the September meeting.
In fact, some Wall Street investment banks also believe that as the economy shows more and more signs of weakness, the Fed’s window for cutting interest rates is shrinking, and the first rate cut may be larger than expected.
Moody's Senior Vice President Madhavi Bokil said last week that if the Federal Open Market Committee (FOMC) decides to stay on hold at its July meeting, the labor market is likely to weaken further, increasing the likelihood of a 50 basis point rate cut in September.
Yung-Yu Ma, chief investment officer at BMO Wealth Management, also said in an interview with CNBC on Thursday that there is a possibility that the Federal Reserve will cut interest rates by 50 basis points in September.
Some economists worry that the resilience of U.S. consumer spending and the fact that the unemployment rate does not seem to be rising significantly suggest the Fed should still remain cautious.
A growing number of economists in a recent Reuters poll said the Federal Reserve will cut interest rates just once this year, in September and December, a view they have maintained for the past four months.
All 100 economists surveyed said the Fed will keep interest rates unchanged on July 31, but more than 80% of economists (82 of 100) predicted the Fed would cut interest rates by 25 basis points for the first time in September, up from nearly two-thirds last month. Another 15 expected the Fed to cut interest rates for the first time in November or December, and only three said the Fed would wait until next year.
"We expect the September and December FOMC meetings to cut the target rate by 25 basis points, barring a meaningful upside surprise in inflation data," wrote Jonathan Pingle, chief U.S. economist at UBS. "It would take unexpectedly weak employment data to create any urgency to cut rates more than that this year."
The article is forwarded from: Jinshi Data