Traders Adjust Rate Cut Bets

Traders have slightly increased their expectations for a 50-basis-point rate cut by the Federal Reserve in November, following the report of modest inflation increases in August, which suggests a focus on the labor market.

Interest rate futures now indicate a 54% chance for a half-point cut, up from 46% for a smaller quarter-point reduction. Overall, traders foresee a total decrease of 75 basis points by year-end from the current 4.75%-5.00% policy rate.

Citi strategists also believe in a 50 basis point rate cut in November, but emphasize that this will critically depend on upcoming data, especially the next job report. Low jobless claims keep a steady outlook, but PMI employment data is under scrutiny.

Fed Chair Jerome Powell indicated that the initial 50-basis-point cut signals the Fed’s readiness to act if labor market weakness continues. Citi notes that should unemployment stabilize, the Fed might reduce cut pace to 25bp per meeting, but new economic data could maintain a faster cut tempo.

Despite stable jobless claims and low layoffs, Citi points out a declining hiring rate with softer private payroll growth currently averaging around 90,000 jobs monthly, hinting at potential future unemployment rises.

As two jobs reports arrive before the November FOMC meeting, Fed officials will have critical data to evaluate the employment market’s softening.

The PCE price index, the Fed’s preferred inflation metric, climbed 0.1% in August, bringing annual inflation to 2.2%, down from 2.5% in July — the lowest since February 2021.

Core PCE, excluding food and energy, saw a 0.1% monthly rise and a 2.7% yearly increase, aligning with forecasts. Fed officials often prefer core PCE as a more accurate long-term inflation indicator, which was slightly up from July’s rate of 2.6%.