By Gertrude Chavez Dreyfus
NEW YORK (Reuters) – Futures contracts for the federal funds rate, which measures the cost of unsecured overnight loans between banks, priced in a 60 percent chance that the U.S. Federal Reserve will cut interest rates by 50 basis points on Wednesday, London Stock Exchange calculations showed.
This rate has increased from 45% last Friday and from 25% following the release of the US Consumer Price Index report last week.
The Federal Reserve will hold a two-day monetary policy meeting starting Tuesday and is widely expected to cut its benchmark overnight interest rate, which is currently between 5.25% and 5.50%. However, the rate cuts have been swings of between 50 and 25 basis points over the past few days.
For 2024, interest rate futures have priced in about 120 basis points of easing, and about 250 basis points of cuts by September 2025.
Until last Friday, the odds were favoring a 25 basis point rate cut. But reports in the Wall Street Journal and the Financial Times late Thursday that a 50 basis point rate cut was still an option, and comments from former New York Fed President Bill Dudley calling for a big cut, have shifted market expectations.
On Monday, Dudley reiterated his position that the Fed needs to cut interest rates aggressively on Wednesday. In an opinion piece on Bloomberg News, the former Fed official noted that the Fed’s dual mandate of price stability and maximum sustainable employment has become more balanced, suggesting that monetary policy should be neutral, neither constraining nor boosting economic activity.
“But short-term interest rates remain well above the neutral level. This mismatch must be corrected as soon as possible,” Dudley wrote.
But whether the Fed decides to cut rates by 50 or 25 basis points, Boris Kovacevic, global macro strategist at Convera in Vienna, said it doesn’t really matter in the end “given the long delay and the transmission mechanism, but it does matter in terms of how they want to look at it.”
“If they go above 50, there is a possibility that the Fed has some information that investors don’t have and that the risk of a recession is more likely than currently expected and priced in.”
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis)