The likelihood of the Federal Reserve making a 50 basis point rate cut at this week’s Federal Open Market Committee (FOMC) meeting has surged, according to the CME Fed Watch tool. As of Monday, the probability stands at 60%, doubling from 30% just a week ago and ticking up from 50% on Friday.
Bigger Cut: This growing sentiment was underscored by a recent Wall Street Journal article penned by Greg Ip, who suggested that a victory over inflation is now in sight, with the labor market showing clear signs of cooling. “The Federal Reserve’s interest-rate decision this week looks more difficult than it should be. The real question isn’t how much to cut, but where rates ought to be. The answer is much lower. That argues for a half-point cut,” Ip wrote on Sunday.
- Ip’s view is echoed by former New York Federal Reserve President Bill Dudley, who made a strong case for a 50 basis point cut in a Bloomberg piece this morning writing “Monetary policy is tight, when it should be neutral or even easy. And a bigger move now makes it easier for the Fed to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook.”
Smaller Cut: Despite this shift in expectations, a half-point cut remains far from a certainty. Goldman Sachs weighed in on Friday, maintaining its forecast for a quarter-point cut at the upcoming FOMC meeting. The investment bank argued that while inflation may be cooling, the Fed is likely to take a more measured approach in response to recent economic data, especially given the uncertainty surrounding the full impact of prior rate hikes.
Signal: With just one day until the two-day FOMC meeting kicks off, market participants are eagerly awaiting signals from Fed Chair Jerome Powell. Historically, Powell has been transparent about the Fed’s policy trajectory leading into meetings, and a lack of clear communication at this stage leaves room for speculation about whether the Fed is seriously considering the more aggressive 50 basis point cut.
