Fed Faces Likely but Uncertain Rate Cut Decision

The Federal Reserve is considering a significant interest-rate cut at its upcoming meeting, as market sentiment shifts toward more aggressive measures to prevent labor market deterioration. While a quarter-point cut is still slightly more probable, the likelihood of a larger half-point cut has increased dramatically.

The Federal Reserve is weighing a notable interest-rate cut next week, influenced by rate-futures contracts suggesting a more aggressive approach. Financial markets now price a higher likelihood that the Fed will act decisively. While a quarter-point reduction remains a slight favorite for the Sept. 17-18 meeting, the chances of a half-point cut have significantly risen.

According to data from futures tied to the Fed's policy rate, there is about a 47% chance of a half-point cut, up from 28% just a day earlier. This shift is driven by bets that the Fed will aim to pre-empt a worsening labor market rather than take a cautious, incremental approach. Gregory Daco, an economist at Parthenon, argues that the Fed is already behind the curve and needs to act swiftly.

Further bolstering this argument, Fed policymakers including San Francisco Fed President Mary Daly and Fed Governor Chris Waller have expressed readiness to support larger cuts if economic conditions justify it. This changing sentiment, evolving data, and a tender employment situation have all set the stage for a potentially more substantial rate reduction at the forthcoming meeting.

(With inputs from agencies.)