By Ann Saphir
Traders are anticipating a significant move by the Federal Reserve as they keep bets on a half-percentage-point interest rate cut on Wednesday. The expectation of this bold move may put pressure on central bankers to deliver as anticipated.
According to futures tied to the Fed policy rate, there is a two-in-three chance of a bigger cut, compared to a one-in-three chance of a more moderate 25 basis-point reduction. Analysts at major Wall Street firms are still expecting the latter.
The Fed is set to begin its two-day policy-setting meeting today, with additional meetings scheduled in early November and mid-December. Traders are forecasting a total of two half-point rate cuts and one quarter-point cut across the remaining meetings for 2024, as indicated by rate-futures.
With inflation at 2.5% and the unemployment rate at 4.2%, most policymakers believe it is time to start cutting rates to prevent a significant slowdown in the economy. Market expectations have shifted from a quarter-point rate cut to a half-point cut after recent reports suggested a larger reduction was still on the table.
Despite positive economic indicators such as unexpected retail sales growth in August and a rebound in manufacturing, the market sentiment for a larger rate cut remains strong. Analysts speculate that the reports were influenced by guidance from the central bank, with no apparent pushback from the Fed further solidifying these assumptions.
While some economists believe a half-point rate cut is likely, there may be dissent within the Fed regarding the decision. Fed policymakers refrain from making public statements on monetary policy or the economy in the days leading up to a rate-setting meeting.
As the market leans towards a larger policy easing, analysts are cautious about the potential impact on volatility. The Fed's communication strategy during the blackout period before the meeting has been described as "clumsy" by some experts.
Analysis:
The Federal Reserve is expected to make a bold move by cutting interest rates by half a percentage point, a decision that could have significant implications for the economy. Traders are betting on this outcome, putting pressure on central bankers to deliver as anticipated. While positive economic indicators may suggest a strong economy, the market sentiment favors a larger rate cut to prevent a slowdown. Analysts believe that the recent reports were influenced by guidance from the central bank, leading to expectations of a more substantial reduction. The Fed's communication strategy during the blackout period has been seen as a challenge, with some experts expressing concerns about potential volatility in the market. Overall, the decision on interest rates could impact various aspects of the economy and financial markets, making it a critical development to watch.