Federal Reserve Chairman Jerome Powell delivers a speech on the Federal Reserve’s Semiannual Monetary Policy Report at a hearing of the House Financial Services Committee at the U.S. Capitol in Washington, DC, on July 10, 2024.
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Traders are now 100% certain the Fed will cut interest rates in September.
There is now a 93.3% chance that the Fed’s September target range for the federal funds rate, its key rate, will be lowered by a quarter of a percentage point to 5% to 5.25% from the current 5.25% to 5.5% range. To CME FedWatch Tools. The tool said there is a 6.7% chance of a half-percentage point rate cut in September, as some traders believe the Fed will cut interest rates at its meeting in late July and again in September. Taken together, your chance of winning is 100%.
The catalyst for the change in odds was last week’s June consumer price index, which fell 0.1% from the previous month. This brings annual inflation to 3%, the lowest level in three years. A month ago, the probability of a rate cut in September was about 70%.
The CME FedWatch tool calculates rates based on trading in the exchange’s federal funds futures contract, where traders place bets on the level of the effective federal funds rate in 30-day increments. Simply put, this reflects where traders invest their money. The real chance that interest rates will stay where they are today in September is not zero, but that means no traders are willing to put up actual money to bet on it.
Recent hints from Fed Chairman Jerome Powell have also bolstered traders’ belief that the central bank will take action in September. Powell said on Monday that due to the lag effect of tightening policy, the Fed will not wait until inflation rises all the way to the 2% target rate before starting to cut interest rates.
He said the Fed is seeking “greater confidence” that inflation will return to 2%.
“What boosts confidence is better inflation data, and we’ve had some of that recently,” Powell added.
The Federal Reserve will decide on interest rates on July 31 and September 18.
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