Fed's 50 Basis Point Rate Cut Expectations Heat Up

Insights - Nick Timiraos, a spokesperson for the Federal Reserve, recently indicated a dovish outlook, leading the market to expect a 65% probability of a 50 basis point rate cut in September. Analysts warn that if the Fed only cuts rates by 25 basis points, the market may face significant selling pressure.

In his latest article on September 17, Timiraos cited former Fed advisor William English, stating that if the Fed is more concerned about growth and employment than inflation, it may opt for a larger cut for added insurance.

Timiraos also referenced former Dallas Fed President Robert Kaplan, who noted that if officials reflect on their potential mistakes during this week’s meeting, starting the rate cut cycle with a 50 basis point reduction would be reasonable.

If the Fed cuts by 50 basis points and the economy remains stable, officials are unlikely to regret the decision, especially since interest rates are still high enough to somewhat suppress inflation. However, if the Fed opts for a 25 basis point cut and the labor market worsens, the sense of regret may be stronger.

Overall, Timiraos' wording and the individuals he quotes suggest a leaning toward a 50 basis point cut, increasing the likelihood of such a move in September.

According to the CME FedWatch Tool, the market currently anticipates a 65% chance of a 50 basis point cut and a 35% chance of a 25 basis point cut.

Source: CME FedWatch Tool

The trading volume of October Federal Funds futures, betting on this week’s Fed rate decision, has reached the highest level since 1988, with most new contracts betting on a 50 basis point cut, one-third of which were established this week.

Subadra Rajappa, head of interest rate strategy at Societe Generale, warned that if the Fed opts for a smaller cut and Powell signals a gradual approach, the market may face considerable selling pressure.

ZeroHedge also noted that commodity trading advisors (CTAs) have accumulated their largest long positions in the bond market in three years. If the Fed falls short on rate cuts tomorrow, it could trigger widespread stop-losses, impacting financial markets.