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By: Don Driggers
Wall Street investors are increasingly betting that the Federal Reserve will opt for a larger-than-expected interest rate cut, according to the latest market data. As the central bank gears up for its two-day policy meeting starting Tuesday, futures markets suggest there is a growing likelihood of a significant 50 basis-point cut, rather than the more typical quarter-point reduction.
Data from CME FedWatch, highlighted in an exclusive New York Post report, shows a 61% chance that the Fed will move forward with the larger rate cut during its decision on Wednesday. This marks a notable shift from just last week when the odds stood at 45%, and a sharp jump from 25% a few days earlier. The shift comes in the wake of worse-than-expected inflation data, especially from the Consumer Price Index (CPI), which rattled market confidence and led investors to recalibrate their expectations.
The Fed’s decision on whether to cut rates by 50 basis points or the smaller 25 basis points is now viewed as a toss-up. The current benchmark overnight interest rate sits in the range of 5.25% to 5.50%. What once seemed like a more predictable quarter-point cut has been complicated by recent economic data and market sentiment.
As of September 9, the market had overwhelmingly predicted a quarter-point cut, with a 70% probability, while the chances of a 50-point cut were pegged at just 30%. But the tide has shifted dramatically after inflation reports, including the Core CPI and core wholesale prices—measures that exclude volatile food and energy costs—came in higher than expected, dampening hopes for a swift economic recovery.
The turning point for traders came last Friday when The Wall Street Journal reported that Fed policymakers are increasingly focused on the labor market rather than inflation in their decision-making process. The report, alongside commentary from former New York Fed President Bill Dudley, who publicly argued for a larger cut, boosted the market’s confidence in a half-point reduction. Dudley’s argument, shared in a Bloomberg opinion piece, noted that the Fed’s dual mandate of price stability and maximum employment is nearing equilibrium. He suggested that monetary policy should now shift towards a neutral stance, rather than one that overly corrects the economy.
“Short-term interest rates remain far above neutral, and this disparity needs to be corrected as quickly as possible,” Dudley said, further supporting the case for a 50-basis-point cut.
Boris Kovacevic, a global macro strategist at Convera in Vienna, also weighed in on the growing debate, telling the Post that while the size of the rate cut might not significantly impact the economy in the short term due to the lag in monetary policy effects, it matters for the Fed’s broader messaging. “If they go for a 50-basis-point cut, it could signal that the Fed has information suggesting recession risks are higher than currently anticipated,” Kovacevic said.
The Fed’s aggressive interest rate hikes in 2022 and 2023 were designed to cool the post-pandemic economy, dampening demand and slowing the labor market. While economists had predicted a recession following this series of hikes, easing inflation in recent months has given rise to hopes of a “soft landing” for the U.S. economy.
As the Fed prepares for its latest decision, investors and analysts alike are watching closely, with the debate over the size of the cut set to dominate financial headlines. Regardless of whether the cut is 25 or 50 basis points, it will provide key insights into the Fed’s future direction.
