Fed likely to cut rates by half-point this Wednesday
- Wall Street investors are increasingly betting on a 50-basis point interest rate cut by the Federal Reserve, with a 61% chance as of now.
- This shift follows disappointing inflation data and a change in focus from inflation to the job market among bankers.
- The Fed's decision could signal its awareness of recession risks, impacting market perceptions and economic stability.
Recent data indicates a significant shift in Wall Street's expectations regarding the Federal Reserve's upcoming interest rate decision. As of now, there is a 61% probability that the Fed will implement a 50-basis point cut during its two-day policy meeting, which begins on Tuesday. This marks a notable increase from just 45% last Friday and 25% earlier in the week, following disappointing inflation figures from the Consumer Price Index report. The Fed's current benchmark overnight interest rate stands between 5.25% and 5.50%. The debate over the size of the rate cut has intensified, with traders previously favoring a quarter-point reduction. Influential voices, including former New York Fed President Bill Dudley, have argued for a more substantial cut, suggesting that the Fed's focus has shifted from inflation to the job market. Dudley emphasized the need for monetary policy to be neutral rather than overly corrective, pointing out that short-term interest rates remain significantly above neutral levels. This perspective has led to increased speculation that the Fed may possess information about recession risks that the market has not yet fully priced in. The Fed's aggressive rate hikes in 2022 and 2023 have already impacted demand and slowed hiring, raising concerns about a potential recession. However, easing inflation has sparked optimism that the Fed might achieve a soft landing for the economy, balancing the need for growth with the challenges posed by inflationary pressures.