As US central bankers prepare for their meeting on Wednesday, just a day ago the odds of a 25 basis point (bps) rate cut versus a 50bps cut were split about 50-50. Flash forward to today, and the odds are now in favour of a larger 50bps cut. Predictions from betting market participants and futures markets are showing a growing belief that a larger cut is on the cards.

Fed's 50bps rate cut could be just days away

As of Monday, September 16, 2024, the likelihood of a significant rate cut appears more likely than a 25 basis point cut. Similar to how the money supply fluctuates, the federal funds rate acts as an important benchmark that influences many other interest rates across the U.S. economy. Simply put, it is the rate at which banks lend each other their reserve balances overnight.

The federal funds rate is currently set at a range of 5.25% to 5.50%, a level set in July 2023. That's the highest level since 2001, marking a 23-year high. The last time rates were cut was in March 2020, in response to the Covid-19 pandemic. Just a day ago, the CME's Fedwatch tool showed a 50% chance of both a 25 basis point and a 50 basis point cut. Today, September 16, the chance of a 50 basis point cut has jumped to 61%.

The CME market now shows the probability of a smaller rate cut has dropped to 39%. On September 15, Polymarket bettors pegged the larger cut at 34% while the smaller cut remained at 65%. Fast forward 24 hours, and those odds have reversed. Polymarket now puts the probability of a 50 basis point cut at 52%, with a 25 basis point cut down to 47%. These changing odds highlight the shifting expectations of market participants ahead of the Federal Reserve’s decision.

As traders and analysts adjust their outlooks for the economy, all eyes are on how the central bank’s move will impact the broader financial landscape. With the odds now tilted toward a larger cut, expectations are rising for Wednesday’s crucial meeting. The big question remains: How will markets react when the Fed makes its decision?

What do you think about the upcoming Fed meeting and the cut in the federal funds rate? Share your thoughts and opinions on this topic in the comments section below.
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