Douglas Rissing
Wall Street has already fully priced in three interest rate cuts by the Federal Reserve this year, a day after the central bank hinted it was close to talking about easing monetary policy.
Federal Reserve Chairman Jerome Powell said on Wednesday A rate cut “could be on the table as early as September” if inflation and labor market data continue to improve.
According to the CME FedWatch tool on Thursday, traders are fully pricing in 75 basis points of easing by year-end, broken down into three 25 basis point cuts over the remaining three policy committee meetings of the year.
The federal funds rate is currently between 5.25% and 5.50%. On Wednesday, the Fed decided to keep that level steady, saying its concerns had shifted from simply higher inflation to an equal importance for price stability and employment. While Powell admitted that a rate cut is “on the table,” he added that policymakers are still waiting to gain more confidence that things are moving in the right direction.
“Waiting for the sake of waiting is no way to conduct policy. That was true yesterday and that is true today. Now the odds are increasing that the first cut will be the deepest. The momentum coming out of the data has not been great,” said Renaissance Macro Research on x (formerly twitter).
The odds of a 50-basis-point cut in September have been gaining strength since Powell's remarks on Wednesday. They now stand at 20.5%, up from 12% a day ago. Meanwhile, the probability of a 25-basis-point cut is 79.5%.
Markets are then expecting a 76% and 70% chance of a 25 basis point cut in November and then December, respectively, which would take the federal funds rate to 4.50%-4.75% by year-end.
