As of September 2, 2024, the financial markets are showing strong anticipation for a 25 basis points (bps) reduction in the federal funds rate at the Federal Open Market Committee (FOMC) meeting scheduled for September 18.
The current federal funds rate stands between 5.25% and 5.50%, a level that marks the highest in 23 years.
This high rate has resulted from a series of 11 consecutive rate hikes over the past 18 months, aimed at combating inflation and stabilising the economy.
The CME FedWatch Tool, a widely used indicator of market expectations, assigns a 69% probability to a 25bps cut in the federal funds rate.
In contrast, the likelihood of a more substantial 50bps reduction is estimated at around 31%.
This reflects a cautious outlook among investors, who anticipate a modest adjustment rather than a significant shift in monetary policy.
The predictions market Polymarket provides a similar outlook, with a 76% chance of a 25bps cut and only a 21% chance of a 50bps reduction.
According to Polymarket, just 4% of participants are betting on no change in the rate at the upcoming FOMC meeting.
Despite these expectations, some political figures, including Senator Elizabeth Warren, have advocated for a more aggressive 75bps cut.
They argue that such a reduction is necessary to address ongoing economic challenges.
However, the prediction markets do not currently support this scenario, indicating that investors are not anticipating such a drastic move from the Federal Reserve.
The consensus among market participants reflects a preference for a cautious approach, signaling confidence in a gradual easing of monetary policy.