Traders are now pricing in a 100 basis point rate cut by the end of the year. Economist Mohamed El-Erian said they are overstating the odds of a big rate cut by the Fed before the end of the year: "The fact that the market has priced in so many rate cuts now is problematic in my opinion."

In recent days, traders have solidified bets in the swaps market that the Fed will cut rates by up to 100 basis points by the end of the year, with a 25 basis point or even 50 basis point cut possible in September.

Minutes from the Fed's July meeting showed several officials saw a rate cut as a possibility next month, while the latest employment data showed job growth was far less robust than previously reported, further suggesting a rate cut is all but certain.

According to El-Erian, the Fed will cut rates by 75 basis points by the end of the year. "There is a view that a soft landing needs to be reconciled somehow with a hard landing policy," he said. "The market will adjust at some point."