The chance of the Federal Reserve cutting interest rates at the September meeting is virtually certain. The only question now is whether the Fed will cut by 0.25% or implement a jumbo 0.5% cut. Based on new economic data points, traders have adjusted probabilities over the past week.
According to the latest CME futures prices, the chance of a target rate of between 4.75% and 5.00% at the September meeting, or a 0.5% cut, is now 32% versus last week’s 53% chance of a jumbo cut. The odds of a target rate of between 5.00% and 5.25%, which would represent a cut of 0.25% from the current rate, have risen from a 47% probability the prior week to 68%.
The data shows that although the odds between the two potential cuts were just about even last week, traders are now mainly expecting the smaller of the two.
The Federal Reserve uses interest rate adjustments to stabilize the economy and control inflation. A rate cut tends to stimulate economic growth by making borrowing less expensive, while a rate hike tends to keep inflation in check and slow down an economy.
The shifting probabilities for the September meeting are driven by recent economic data. Both the CPI and PPI posted positive inflation readings this week.
