Sudden Surge! Probability of the Fed cutting interest rates by 50 basis points in September doubles

According to the FedWatch tool of the Chicago Mercantile Exchange, the probability of a 50 basis point rate cut by the Federal Reserve in September has significantly increased.

This may be related to the recent calls for the Fed to cut rates quickly. News on Wednesday indicated that former New York Fed President Bill Dudley called on the Fed to cut rates next week amid concerns of an economic downturn, reversing his long-held view that the Fed should stick to a "higher for longer" rate policy.

Data shows that the probability of lowering the target rate by 50 basis points to 4.75-5.00% at the meeting scheduled for September 18, 2024, has risen to 22.3%. This is a significant increase compared to the 10.7% probability the day before and a stark contrast to the 3% probability last week.

On the other hand, the probability of the Fed lowering the target rate by 25 basis points to 5.00-5.25% has decreased to 76.2%. This is a noticeable drop from the 89.1% probability recorded the previous day and a substantial decrease from the 95% probability recorded last week.

Even the possibility of a 75 basis point rate cut in September is increasing. The probability of the Fed lowering the target rate to 4.50-4.75% has risen from 0.3% the previous trading day to 1.5%, while last week this probability was zero.

These changes in probabilities indicate a shift in traders' sentiment. The increasing probability of lowering the target rate to 4.75-5.00% is particularly noteworthy, as it suggests growing expectations of a 50 basis point rate cut at the September meeting.

In fact, some Wall Street investment banks also believe that with more signs of economic weakness emerging, the Fed's window for rate cuts is narrowing, and the initial rate cut may be larger than anticipated.

Madhavi Bokil, Senior Vice President at Moody's, stated last week that if the Federal Open Market Committee (FOMC) decides to hold rates steady at the July meeting, the labor market may further weaken, increasing the likelihood of a 50 basis point rate cut in September.

Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management, also stated in an interview with CNBC on Thursday that the Fed may cut rates by 50 basis points in September.

Some economists are concerned that the resilience of U.S. consumer spending and the seemingly stable unemployment rate suggest that the Fed should remain cautious.

In a recent Reuters survey, an increasing number of economists are indicating that the Fed will only cut rates once in September and once in December this year. This marks a shift from their stance over the past four months.

All 100 economists surveyed stated that the Fed will keep rates unchanged on July 31, but over 80% of them (82 out of 100) predict that the Fed will cut rates by 25 basis points in September, a proportion that has increased from nearly two-thirds last month Another 15 expect the Fed to cut interest rates for the first time in November or December, with only 3 indicating that the Fed will wait until next year.

Jonathan Pingle, Chief US Economist at UBS, wrote: "We expect that unless there is a significant unexpected increase in inflation data, the FOMC meetings in September and December will cut the target interest rate by 25 basis points. In addition, there needs to be unexpectedly weak employment data to create a sense of urgency for a rate cut this year beyond this level."