By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Futures on the fed funds rate, which measures the cost of unsecured loans between banks, have priced in a nearly 60% chance that the Federal Reserve will cut interest rates by 50 basis points on Wednesday, LSEG calculations show.
That’s up from 45% last Friday and the 25% released last week after a U.S. consumer price index report.
The Fed holds a two-day policy meeting starting Tuesday and is widely expected to cut the benchmark overnight interest rate, which currently stands in a range of 5.25% to 5.50%. However, the rate cut has turned into a coin toss between 50 and 25 bps in recent days.
For 2024, interest rate futures are pricing in an easing of almost 120 basis points and a cut of around 250 basis points through September 2025.
Until last Friday, the odds were pretty much set for a 25bp rate cut. But reports from the Wall Street Journal and Financial Times on Thursday night that a 50bp rate cut was still an option, and comments from former New York Fed President Bill Dudley advocating a massive cut, changed market expectations.
On Monday, Dudley reiterated his position on the need for the Fed to make a deep cut on Wednesday. In an op-ed for Bloomberg News, the former Fed official noted that the Fed’s dual mandate of price stability and maximum sustainable employment has become more balanced, suggesting that monetary policy should be neutral, neither restrictive nor stimulating of economic activity.
“Yet short-term interest rates remain well above neutral. This disparity needs to be corrected as soon as possible,” Dudley wrote.
But whether the Fed raises 50 or 25 basis points ultimately doesn’t matter that much, according to Boris Kovacevic, global macro strategist at Convera in Vienna, “given the long lag and the transmission mechanism, but it does matter how they want to be perceived.”
“If they go to 50, there’s a chance the Fed has information that investors don’t have and the risk of a recession is greater than currently expected and priced in.”
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis)
