Bets on 50 bps Fed rate cut in September bounce back strongly

The probability of a 50 basis point (bps) interest rate cut from the U.S. Federal Reserve in September has surged overnight, according to CME Group 30-Day Fed Fund futures prices. After collapsing over the last few days to the low teens, the chances of a jumbo cut are now back to near neck-and-neck with a smaller 25 bps cut.

The probability of a 50 bps cut at the September 18, 2024 meeting now stands at 44%, a significant leap from the previous day’s probability of just 14%. Last week, the probability of a large Fed cut was 40%.

On the other hand, the likelihood of a 25 bps cut has dropped. The probability of a smaller cut is 56%, down from 86% the previous day. Last week the probability stood at 60%.

The overnight surge in chances for a 50 bps cut follows a WSJ article Thursday afternoon that suggests that if Fed officials “could conclude that if they expect a 50-basis-point move is likely in November or December, they ought to make that move now, when rates are farthest from their ultimate destination.”

In the article, Jon Faust, a recent senior adviser to Fed Chairman Jerome Powell, said that while he doesn’t think the economy is in a spot that shouts out for a pre-emptive 50bps cut, his preference “would be slightly toward starting with 50. And I still think there’s a reasonable chance that the FOMC might get there as well.”

The WSJ article was followed by comments from former New York Federal Reserve President Bill Dudley overnight, who said he sees a strong chance of a 50 bps cut. “I think there’s a strong case for 50, whether they’re going to do it or not,” Dudley said at the Bretton Woods Committee’s annual Future of Finance Forum in Singapore. He highlights that rates are currently 150-200 basis points above the neutral rate.