Topline
Forget the massive emergency interest rate cut floated by some in the depths of earlier this month’s panic about the U.S. economy: the market now narrowly expects the Federal Reserve to take the same course of action anticipated before the tizzy.
Federal Reserve Chairman Jerome Powell at a July 31 press conference.
Key Facts
The market-implied odds of a single 25 basis-point cut to the target federal funds rate at the Fed’s Sept. 17-18 meeting rose to 52.5% by mid-morning Monday, according to the CME Group’s FedWatch Tool, pricing in a move from the 5.25% to 5.5% range rates have sat for the last 13 months down to 5% to 5.25%.
The probability of a 50 basis-point cut is now 47.5%, according to CME Group data, which tracks trading of futures contracts speculating on the direction of monetary policy.
That’s a reversal from a week ago, when the odds of a 50 basis-point cut was 85% and of a 25 basis-point cut was 15%.
Interest rate expectations have inched back to where they were prior to the Aug. 2 jobs report, which caused intense recession fears and inspired some calls for the Fed to immediately lower rates in a rare emergency move; the odds of a 25 basis-point cut on Aug. 1 was 78% compared to 22% for a 50 basis-point cut.
Key Background
The shift back toward a standard 25 basis-point cut is a reflection of the more normal sentiment across the market, as stocks erased much of the intense gains experienced during the sharp selloff at the beginning of the month and bond yields returned to where they stood before the doomed jobs report as the flight to safety slowed. The most recent of the Fed’s rate-setting committee’s 10 yearly meetings concluded July 31, two days before the U.S. reported an unexpected rise in the unemployment rate to a near 3-year high of 4.3%, up from July 2023’s 3.5% and triggering one recession indicator which has frontrun prior major downturns. Driving the bounceback in sentiment was last Thursday’s weekly jobless claims report which revealed fewer new unemployment applications than forecasted, easing concerns about an imminent labor market unraveling. Many have long rooted for the Fed to slash interest rates as lower rates typically appease consumers and businesses who enjoy lower borrowing costs and investors attracted to corporations’ higher profit margins, but this month has highlighted why rate cuts are a slippery slope, as they typically come when the economy is in need of a major boost, often out of a recession.
What To Watch For
A trio of monthly inflation reports this week, led by Wednesday’s consumer price index, will likely further shed light on the Fed’s immediate course of action, considering the central bank first began the rate hikes in 2022 to curb inflation and maintains it wants to see continued progress in inflation to lower rates.
Further Reading
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