Fed seen nearly as likely to cut rates by 50 bps as 25 bps

(Reuters) – The Federal Reserve is nearly as likely to deliver an outsized interest-rate cut next week as a more-usual-sized reduction, trading in rate-futures contracts suggested on Friday, as financial markets priced in a bigger chance that the Fed will move more aggressively.

A quarter-point reduction at the Fed’s Sept. 17-18 meeting is still seen as the slightly more likely outcome, but only marginally so.

Futures tied to the Fed’s policy rate now reflect about a 43% chance that the Fed will cut its policy rate, currently in the 5.25%-5.50% range, by a half of a percentage point. That’s up from about 28% on Thursday.

The market move reflects increasing bets by traders that the Fed may try to head off deterioration in the labor market, rather than take a slower see-what-happens-next approach with a smaller opening reduction.

“Our view is that the Fed is behind the curve – that it should have been easing from June even, or potentially May – and that now it needs to catch up and may have to front-load some of the rate cuts,” Parthenon economist Gregory Daco said.

Fed Chair Jerome Powell last month said he would not want to see any further cooling in the labor market.

Since then, other Fed policymakers have signaled their sympathy with that view, including San Francisco Fed President Mary Daly who said a weakening job market would be unwelcome. Fed Governor Chris Waller said he would support front-loading rate cuts should conditions merit.

Typically Powell spends the Thursday and Friday before a policy-setting meeting in half-hour one-on-ones with each of his fellow policymakers to discuss the options on the table and the economic conditions that may warrant one over another.