U.S. Rate Futures Indicate a Likelihood of a 50 Basis Point Cut

The probability of a half-point rate cut has risen to nearly 60%, as the former president of the New York Fed advocated for a substantial reduction.

If the Fed moves forward with a 50 basis point (bp) cut, it could signal that they have information investors lack and that recession risks are higher than anticipated.

Federal funds rate futures, which track the cost of overnight unsecured lending between banks, are now pricing in nearly a 60% chance of a 50 bp rate cut by the Federal Reserve (Fed) tomorrow, according to calculations from the London Stock Exchange Group (LSEG).

This figure represents an increase from 45% last Friday and 25% following the release of the U.S. inflation report last week.

The Fed will hold a two-day monetary policy meeting starting today, where it is expected to lower the benchmark overnight interest rate, currently in the range of 5.25% to 5.50%. However, in recent days, the odds of a 50 bp versus 25 bp cut have fluctuated.

Looking ahead to 2024, rate futures anticipate an easing of nearly 120 bp and total cuts of around 250 bp through September 2025.

As of last Friday, the probability favored a 25 bp cut. However, reports from the Wall Street Journal and Financial Times late Thursday, which suggested that a 50 bp cut remains an option, along with comments from former New York Fed President Bill Dudley advocating for a substantial cut, have shifted market expectations.

Yesterday, Dudley reiterated his stance on the need for the Fed to implement a significant reduction. In a Bloomberg News article, the former Fed official noted that the Fed’s dual mandate of price stability and maximum sustainable employment has become more balanced, indicating that monetary policy should be neutral.