0.5% Or 0.25%? Federal Reserve Cuts In September Seem A Done Deal, But Bond Traders And Crypto Bettors Disagree On How Much

The U.S. Federal Reserve is widely expected to continue raising interest rates aggressively in 2024 to tackle persistent inflation, but there are signs that market participants may not be fully aligned in their expectations.

What Happened: A key divergence has emerged between the implied probabilities of a 50-basis point rate hike at the Fed’s September 2024 meeting, as reflected in the CME FedWatch Tool versus the Polymarket prediction platform.

According to the CME FedWatch Tool, which tracks Fed rate hike probabilities based on trading in the federal funds futures market, the probability of the Federal Reserve implementing a rate cut in September 2024 is mixed, with a slight preference towards maintaining current rates.

As of now, the tool indicates a 55.5% probability for the target rate to be in the range of 475-500 basis points (bps), reflecting a likely decrease from the current rate of 525-550 bps.

Conversely, there is a 44.5% probability that the target rate will be in the range of 500-525 bps, suggesting that a partial rate cut is also a significant possibility.

Comparing the probabilities over time, one month ago on Jul. 8, 2024, the likelihood of a 500-525 bps target rate was notably higher at 71.0%, while the chance of a 475-500 bps target rate was just 4.6%.

Polymarket data indicates a nearly even split in the likelihood of the Federal Reserve implementing a rate cut in September 2024.

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According to the platform, the probability of a 50 basis points (bps) decrease stands at 47%, while the likelihood of a 25 bps decrease is slightly higher at 49%.

This reflects a significant amount of betting interest, with over $1 million wagered on a 50 bps decrease and nearly $488,494 on a 25 bps decrease.

In contrast, the probability of no change in rates is notably lower, at just 5%, with $437,423 wagered.

The chance of a rate increase of 25 bps or more is even less likely, at under 1%, with $371,861 bet.

Why It Matters: The divergence in pricing between these two market-based indicators could stem from differing assumptions about the economic outlook and the Fed’s likely policy response.

The deep liquidity and large institutional participation in the bond futures market often make it a more reliable gauge of investor expectations for monetary policy.

The disconnect is intriguing given the Fed’s clear messaging that it remains laser-focused on restoring price stability, even at the risk of pushing the economy into recession.

The Polymarket pricing anomaly highlights the potential for continued volatility and uncertainty in financial markets as the Fed navigates the delicate balance between taming inflation and avoiding a hard landing for the economy.

What’s Next: These contrasting views are expected to be a key discussion point at Benzinga’s Future of Digital Assets event on Nov. 19.

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