CME FedWatch Index: Rate Cuts Ahead

Posted Thursday, August 22, 2019 by
Shain Vernier • 2 min read

On the Chicago Mercantile Exchange’s (CME) FedWatch Index, traders aren’t buying the concept of a “one-and-done” interest rate cut from the FED. Earlier today, the CME FedWatch adjusted the probabilities of an 18 September ¼ point cut to 99.6% ― very near mathematical certainty. This is a bit surprising following the divided tone of yesterday’s FOMC Minutes. With FED Chairman Jerome Powell due to speak in Jackson Hole tomorrow morning, we may be in for forex action ahead of the weekly closing bell.

CME FedWatch Projects Multiple Rate Cuts By 2020

For those who aren’t familiar, the CME FedWatch Index is a barometer put forth by the Chicago Mercantile Exchange to measure investor sentiment facing FED monetary policy. Today’s figures are raising some eyebrows, as they contradict the FED’s current public stance. Below are some of the key points the index is now making toward future FOMC actions:

  • 18 September: A rate cut is all-but-assured. With a 99.6% chance of a ¼ point cut and the other 0.4% calling for a ½ point reduction, rates are widely expected to fall.
  • 30 October: The waters become murky in October. The FedWatch is calling for a 60.4% chance of successive September/October ¼ point cuts. In addition, the odds stand at 36.6% of rates being held at September levels (assuming a September ¼ point cut). The outlier is the 3% probability that rates will actually be restored to current levels (2.0%-2.25%).
  • 11 December: This is where the rubber will hit the road for FED policy. As of now, the index is assigning a 98.7% chance that rates will close the year at or beneath 2%. 81.7% of the tally currently project the final Federal Funds Rate to wrap up 2019 between 1.25% and 1.75%. 

Bottom Line

At this point, the “smart” money represented by the CME FedWatch widely expects the FED to slash rates until early 2020. If this scenario comes to pass, be on the lookout for a sluggish USD. In addition, the uptrend in U.S. equities will likely continue through Q1 2020.

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