Likelihood of Jumbo Fed Rate Cut in September Plummets

The likelihood of a 50 basis point interest rate cut from the Federal Reserve in September has notably decreased following a stronger-than-expected core Consumer Price Index (CPI) reading earlier in the week. Nevertheless, traders are still anticipating a rate reduction, now favoring a smaller cut of 25 basis points.

Currently, the probability of a 50 basis point reduction has dropped to 12%, down from 34% the day before and 38% the week prior. In contrast, the expectations for a 25 basis point cut have increased significantly, with the current probability sitting at 88%, up from 66% the previous day and 62% last week.

These probabilities are derived from the CME Group’s 30-Day Fed Fund futures prices, which capture market expectations regarding changes in the Federal Reserve’s interest rates.

On Wednesday, the core CPI, which excludes food and energy costs, increased by 0.3% month-over-month, surpassing the estimated rise of 0.2%. The headline CPI rose by 0.2%, in line with expectations.

Market participants are closely monitoring the upcoming Federal Reserve meeting on September 18. Most expect Fed Chairman Jerome Powell to adhere to his commitment to implement a rate cut.

Powell emphasized in his August speech at Jackson Hole that “the time has come for policy to adjust,” adding that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”