By Ann Saphir
(Reuters) – Traders continued to bet on Tuesday that the Federal Reserve will begin an expected series of half-percentage-point rate cuts on Wednesday, a prospect that could itself put pressure on central bankers to follow through.
Futures tied to the Fed’s policy rate Tuesday morning implied a two-in-three chance of a bigger cut, while the one-in-three chance of the more moderate 25 basis point cut still being anticipated by analysts at most major Wall Street firms remains at 25 basis points.
The Fed begins its two-day policy-setting meeting today and will meet again in early November and mid-December.
Interest rate futures show that traders expect rates to be cut a total of two times by half a point, plus one time by a quarter point, in the three remaining meetings before 2024.
The Fed has kept its policy rate stuck at 5.25%-5.50% for more than a year in an attempt to steer high inflation out of the economy.
Inflation has now fallen to 2.5%, and most policymakers see it as a step toward the Fed’s 2% target. Meanwhile, the unemployment rate rose to 4.2% last month. In fact, nearly all Fed policymakers agreed in July that it would soon be time to cut rates to prevent the economy from slowing too much.
Until late last week, traders had been betting on a quarter-point rate cut at the start of the series, but they switched to a half-point cut after reports from the Wall Street Journal and the Financial Times on Thursday evening suggested a bigger rate cut was still an option.
Since then, those market expectations have only grown stronger. They were little changed on Tuesday as government reports showed U.S. retail sales unexpectedly rose in August and manufacturing rebounded, signs that the economy is still going strong.
Still, analysts have speculated that last week’s news reports were at least partly based on guidance from the central bank. The lack of apparent pushback from the Fed since then has only reinforced those assumptions.
“As time passes and the Fed makes no attempt to challenge market prices, the likelihood of a 50 basis point rate cut at the September FOMC meeting has increased. We reaffirm our view that the Fed is likely to cut rates by 50 basis points, although it is still not a cakewalk,” wrote Krishna Guha of Evercore ISI, one of the few economists calling for a bigger rate cut before last week’s shift in financial market expectations.
With markets leaning heavily toward more policy easing, he wrote, “it’s much harder to surprise hawkish than dovey politicians. And the Fed definitely doesn’t think this is a good time to introduce more (volatility).”
Guha predicted that a half-percentage-point rate cut could trigger resistance within the Fed, but so could a smaller cut of a quarter of a percentage point.
Fed policymakers agree not to make any public statements about monetary policy or the economy during the 10 days before a rate meeting.
“We think the Fed is trying to correct course at an unfortunate time,” wrote Tim Duy of SGH Macro Advisors. “The blackout period prevents conventional communication and the Fed is left with something more awkward.”
(Reporting by Ann Saphir)
