Traders now betting on smaller Fed rate cut in September

Investing.com -- The likelihood of a Federal Reserve interest rate cut at the September 2024 meeting is all but guaranteed. However, the question now centers around whether the Fed will cut 25 basis points (bps) or follow through with a jumbo 50 bps cut. Traders have adjusted probabilities over the last week based on new economic data points.

The probability of a target rate of 4.75 - 5.00 at the September 18, 2024 meeting, or a 50 bps cut, is now 32% versus a 53% probability of a jumbo cut last week, according to the latest CME futures prices. On the other hand, the odds of a target rate of 5.00 - 5.25, which would represent a decrease of 25 bps from the current rate, have risen to 68% from a 47% probability the previous week.

Overall, the data shows that while the odds were essentially even last week between the two potential cuts, traders are now mainly betting on the smaller of the two cuts.

The Federal Reserve uses interest rate adjustments as a tool to control inflation and stabilize the economy. A rate cut can stimulate economic growth by making borrowing cheaper, while a rate hike can slow down an overheating economy and keep inflation in check.

Recent economic data is driving the shifting probabilities for the September 2024 meeting. This week, both the PPI and CPI posted positive inflation readings. Meanwhile, recent stronger-than-expected retail sales data supports the view of a soft landing and a smaller cut.

After the recent sell-off, including last Monday's dramatic swoon, stocks have bounced back strongly as the soft landing theory continues to gain steam.