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Key Points
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Traders were betting that the Federal Reserve would continue to cut interest rates aggressively later this year after the Fed delivered a larger-than-average 50 basis point cut at its meeting on Wednesday.
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Wall Street expects the Fed to cut rates by another 75 basis points by the end of the year, meaning another 50 basis point cut in November or December.
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Market expectations for rate cuts in 2025 also exceed the estimates policymakers set out in their quarterly economic forecasts.
Traders on Wednesday raised bets that the Federal Reserve would continue to cut rates aggressively this year after the central bank kicked off its long-awaited easing cycle with a 50 basis point cut.
The Fed on Wednesday cut its federal funds rate target range to between 4.75% and 5% from 5.25% to 5.5%. The cut met investor expectations that the central bank would begin this rate-cutting cycle with aggressive action as it seeks to shore up a cooling labor market while maintaining inflation’s downward drift toward its 2% annual target rate; the market’s perceived probability of a 50-point cut rose to more than 60% earlier this week from just 14% a week ago.
Wall Street saw Wednesday’s policy shift as a sign of more aggressive cuts to come. Traders now see a more than 50% chance that the Fed will cut its federal funds rate target range by another 75 basis points to between 4% and 4.25% by year’s end. With only two more Fed meetings to go, one in November and one in December, that would mean another 50-point cut at one of those meetings.
Fed officials do not expect the rate cuts to be that dramatic this year, according to their quarterly economic forecasts. Nine of the 19 members of the Federal Open Market Committee (FOMC) that submitted forecasts estimated that the policy rate would end the year between 4.25% and 4.5%. Only one member expects the next two cuts to match market expectations. Two members do not expect to cut rates at all later this year.
Policymakers expect interest rates to be slightly lower in the near term than their previous estimates, which were released in June. The FOMC consensus is for the rate to reach 3.4% by the end of 2025, down from the 4.1% estimate in June.
However, the long-term neutral rate, where policy is neither restrictive nor accommodative, is expected to be slightly higher (2.9%) than previously forecast (2.8%). Meanwhile, markets saw a nearly 60% chance that the fed funds rate will fall below 3% within the next 12 months.
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