Traders Pricing in 100% Chance Fed Will Cut Interest Rates in September

Market participants are increasingly convinced that the Federal Reserve will start cutting its benchmark interest rate in September, with more cuts to follow before the end of the year, even as Fed officials say they need to see more economic data before adjusting policy.

According to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data, traders are pricing in a 100% chance that the Federal Reserve will cut its influential fed funds rate in September. That’s up from the 73% likelihood priced in just a week ago.

Market participants are also pricing in a high probability that once the Fed makes its first move in September it will continue cutting at the November and December meetings of the policy-setting Federal Open Market Committee. Traders predict there’s a roughly 60% chance the fed funds rate will be 50 basis points lower than its current rate in November and 75 basis points lower in December.

Rate-Cut Hopes Have Risen as Inflation Subsides

The increased expectations follow a number of data releases that have shown inflation is moderating and economic activity is slowing, an indication that the Fed’s two-year campaign of high interest rates is having its intended effect.

Fed officials have acknowledged the progress in the fight against inflation, but have said they will be reliant on economic data to give them more confidence that inflation is moving toward their annual goal of 2%. They’ve also said they are watching labor market conditions, which could spur the Fed to act if they deteriorate significantly.

On Monday, Fed Chair Jerome Powell said central bankers are making rate-cut decisions on a “meeting-by-meeting” basis, declining to give a timeline for rate cuts.

Traders See Almost No Chance of July Cut

A rate cut would give some relief to businesses and households pressured by high borrowing costs, as rates on mortgages, credit cards and other loans would follow the Fed’s lead. The fed funds rate, which have been at a two-decade high for the past year, influences costs on all sorts of loans.

While market participants are increasingly confident the Fed will cut rates soon, economic data and comments from Fed officials could change that quickly. At the start of this year, fed fund futures indicated that traders were pricing in six rate cuts by the Fed this year, but those expectations quickly faded as inflation was more stubborn than expected in the first several months of 2024.

The next FOMC meeting will be convened in two weeks, but traders see almost no chance of a rate cut at that meeting. Instead, they’ll be scrutinizing the FOMC’s post-meeting statement and what Powell says during his press conference for clues on when the Fed might act.

At its last meeting in June, a quarterly survey of FOMC members showed that they expected just one rate cut before the end of the year.