Federal Reserve Rate Cut Expectations

(Reuters) – Traders predict a high likelihood of a second 50-basis-point interest rate cut by the Federal Reserve in November. This speculation follows a government report indicating that U.S. inflation has eased, aligning more closely with the central bank’s target of 2%.

According to the Commerce Department, inflation, as measured by the year-over-year rise in the personal consumption expenditures price index, was 2.2% in August. This aligns with Fed Chair Jerome Powell’s earlier statements following the recent half-point cut, which signaled the beginning of anticipated further reductions in the policy rate. The aim is to support what Fed policymakers perceive as a softening yet still robust labor market.

Omair Sharif from Inflation Insights remarked, “If the Fed wants to cut by another 50 basis points in November, the inflation data isn’t going to stand in their way. In fact, the faster inflation cools, the more impetus there is for them to move faster to get to neutral.”

Interest rate futures now show a 54% probability for a half-point cut in November compared to a 46% chance for a quarter-point cut. Traders generally bet on a reduction of 75 basis points for the policy rate by year-end, estimating it will range between 3.00% and 3.25% by mid-2025, just above what most Fed policymakers consider to be the neutral rate.