Market estimates indicate that there is almost an equal likelihood of the Federal Reserve lowering interest rates by 50 basis points or 25 basis points next week. The trading of interest rate futures contracts on Friday, September 13th, showed that the financial markets have already factored in the possibility of the Federal Reserve taking a more proactive stance.
The Federal Reserve is scheduled to hold a monetary policy meeting on the 17th and 18th of the upcoming week. Currently, the Federal Reserve’s target range for the federal funds rate is between 5.25% and 5.5%.
According to the CME Group’s FedWatch tool, traders currently anticipate a 55% probability of a 25-basis point rate cut in September, while the likelihood of a 50-basis point cut has risen to 45%, a significant increase from the previous day’s 28% probability.
Boosted by expectations of a larger rate cut, U.S. stocks moved higher on Friday. The S&P 500 index rose by 0.6%, the Dow Jones Industrial Average gained 0.8% (up by 343 points), and the Nasdaq Composite Index increased by 0.7%.
Reuters reports that market trends reflect traders increasingly betting on the Federal Reserve potentially making a substantial rate cut, as the Fed aims to prevent further deterioration in the labor market rather than adopting a wait-and-see approach with gradual small rate cuts.
Federal Reserve Chair Jerome Powell stated in August that he does not want to see further cooling in the labor market.
Subsequently, other Federal Reserve policymakers have expressed similar views. San Francisco Fed President Mary Daly mentioned that a weak employment market is undesirable, while Fed Governor Chris Waller stated that he would support an early rate cut if circumstances allow.
Powell typically engages in half-hour one-on-one meetings with each policymaker before the policy-setting meetings on Thursdays and Fridays to discuss the available options and the economic conditions that may necessitate certain actions.
Economic data indicating a slowdown in inflation also supports the case for a rate cut. The Consumer Price Index (CPI) in August had an annualized rate of 2.5%, the lowest level since February 2021. Meanwhile, wholesale prices rose by 0.2% in August, in line with expectations. The unexpected decline in employment data for August further bolsters the calls for a rate cut by the Federal Reserve.
Bloomberg economists Estelle Ou and Anna Wong noted that the CPI and PPI data for August suggest that the Federal Reserve’s core Personal Consumption Expenditures (PCE) index, to be announced on September 27th, is likely to remain stable at 0.16%.
They mentioned that Federal Reserve officials view this data as a green light for starting rate cuts this month, possibly even by 50 basis points. However, should the Federal Reserve not provide a clear signal for a significant rate cut, they slightly lean towards a 25-basis point rate cut in September.
Mark Dowding, Chief Investment Officer at RBC BlueBay, commented that the Federal Reserve may gradually lower rates, starting with a 25-basis point cut. “From our perspective, the economy seems to be performing well.”