Federal Reserve Bank Chairman Jerome Powell speaks during a House Financial Services Committee hearing on the Federal Reserve’s semiannual monetary policy report at the U.S. Capitol on July 10, 2024 in Washington, DC.
Bonnie Cash | Getty Images
Traders are now 100% confident that the Federal Reserve will cut rates by September.
There is now a 93.3% chance that the target federal funds rate, the policy rate, will be cut by a quarter of a percentage point in September from the current 5.25% to 5.50%, to 5% to 5 .25%. to the CME FedWatch tool. And there is a 6.7% chance that rates will be half a percentage point lower in September, leading some traders to believe the central bank will cut at its meeting in late July and again in September, the tool said. All things considered, you get a 100% chance.
The catalyst for the change in odds was the June Consumer Price Index update announced last week, which showed a 0.1% decline from the previous month. That brought annual inflation to 3%, the lowest in three years. The chance that interest rates would be cut in September was about 70% a month ago.
The CME FedWatch Tool calculates odds based on trading Fed Funds futures contracts on the exchange, where traders place their bets on the level of the effective Fed Funds rate in 30-day increments. Simply put, this is a reflection of where traders put their money. The actual chance of interest rates remaining at current levels in September is not zero percent, but what this means is that no trader is willing to actually risk money betting on that.
Recent hints from Fed Chairman Jerome Powell have also strengthened traders’ belief that the central bank will act by September. On Monday, Powell said the Fed would not wait for inflation to reach all the way to its target rate of 2% before starting to cut, because of the lag effects of the tightening.
The Fed is looking for “more confidence” that inflation will return to the 2% level, he said.
“What increases that confidence in that is more good inflation data, and lately we’ve been getting some of that,” Powell added.
The Fed will then make a decision on interest rates on July 31 and again on September 18. The Fed will not meet to discuss interest rates in August.