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Markets expect 25bps Fed rate cut with low chance of larger reduction

Markets expect 25bps Fed rate cut with low chance of larger reduction

GrafaGrafa2024/09/03 03:35
By:Liezl Gambe

As of September 2, 2024, the financial markets are showing strong anticipation for a 25 basis points (bps) reduction in the federal funds rate at the Federal Open Market Committee (FOMC) meeting scheduled for September 18.

The current federal funds rate stands between 5.25% and 5.50%, a level that marks the highest in 23 years.

This high rate has resulted from a series of 11 consecutive rate hikes over the past 18 months, aimed at combating inflation and stabilising the economy.

The CME FedWatch Tool, a widely used indicator of market expectations, assigns a 69% probability to a 25bps cut in the federal funds rate.

In contrast, the likelihood of a more substantial 50bps reduction is estimated at around 31%.

This reflects a cautious outlook among investors, who anticipate a modest adjustment rather than a significant shift in monetary policy.

The predictions market Polymarket provides a similar outlook, with a 76% chance of a 25bps cut and only a 21% chance of a 50bps reduction.

According to Polymarket, just 4% of participants are betting on no change in the rate at the upcoming FOMC meeting.

Despite these expectations, some political figures, including Senator Elizabeth Warren, have advocated for a more aggressive 75bps cut.

They argue that such a reduction is necessary to address ongoing economic challenges.

However, the prediction markets do not currently support this scenario, indicating that investors are not anticipating such a drastic move from the Federal Reserve.

The consensus among market participants reflects a preference for a cautious approach, signaling confidence in a gradual easing of monetary policy.

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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