Key Takeaways
Traders are pricing in a 100% chance of a rate cut when the Federal Reserve meets in September. Fed officials themselves have said the decision will be based on economic data and that no timeline for rate cuts has been set. Futures data also suggests traders expect the Fed to continue cutting rates once it starts.
Federal Reserve officials have said they need to see more economic data before adjusting policy, but market participants are growing confident the central bank will begin cutting interest rates in September and will make additional cuts by the end of the year.
Traders now rate the Fed's influential federal funds rate cut in September at 100% chance, up from a 73% chance priced in just a week ago, according to CME Group's FedWatch tool, which uses data from federal funds futures contracts to forecast interest rate movements.
Market participants also expect the Fed will likely continue to cut interest rates at the November and December meetings of its policy-setting Federal Open Market Committee after taking its first step in September. Traders see about a 60% chance that the federal funds rate will be 50 basis points lower than the current rate in November and 75 basis points lower in December.
Inflation subsides, raising hopes of interest rate cuts
These rising expectations follow the release of a slew of data showing inflation easing and economic activity slowing, suggesting that the Fed's two years of high interest rates are having their intended effect.
Fed officials acknowledged progress in fighting inflation but said they would rely on economic data to become more confident that inflation was on track to reach their 2% annual goal, and that they were closely monitoring labor market conditions and could take action if the labor market deteriorated significantly.
Fed Chairman Jerome Powell said Monday that the central bank is making rate cut decisions “on a meeting-by-meeting basis,” declining to specify a timeline for rate cuts.
Traders see little chance of a rate cut in July
Lower rates would provide some relief to businesses and households squeezed by high borrowing costs, as interest rates on mortgages, credit cards and other loans would follow the Fed's dictate. The federal funds rate, which has been at a 20-year high for the past year, affects the cost of all kinds of loans.
Market participants are growing more confident that the Fed will cut rates soon, but that could change quickly depending on economic data and comments from Fed officials. Earlier this year, federal funds futures suggested traders were pricing in six rate cuts from the Fed this year, but those expectations quickly faded as inflation has been stronger than expected in the first few months of 2024.
The next FOMC meeting is in two weeks, and traders see little chance of a rate cut at the meeting. Instead, they will be scrutinizing the post-meeting statement and Chairman Powell's press conference for clues as to when the Fed might act.
A quarterly survey of FOMC members at their last meeting in June indicated they expected just one rate cut by the end of the year.