'What Changed?' — Federal Reserve May Take A Bigger 50 Basis Points Rate Cut Bite Next Week, Market Odds Imply

Financial markets have abruptly shifted expectations, now pricing in a significant chance of a 50 basis point interest rate cut by the Federal Reserve at its September 2024 meeting.

What Happened: This marks a stark departure from recent projections.

Polymarket data shows the probability of a 50+ basis point decrease in Fed interest rates has jumped to 31%, with a 25 basis point cut at 69%.

This rapid change in sentiment occurred over a matter of hours, as the odds of a 50 basis point cut were under 10% on Wednesday.

Jim Bianco of Bianco Research highlighted this shift on social media, noting that the odds of a 50 basis point cut rose from 14% to nearly 50% in just 8 hours, according to the CME FedWatch tool.

8 hours ago, the odds of a 50 bps cut at Sep 18's FOMC meeting were just 14%. Now, they're ~50/50 (46%).

This is happening as stocks have rallied big in the last 2 days, and futures are quiet overnight.

In other words, stocks are not exhibiting signs of stress.

What changed? https://t.co/szxw7wZy1Y pic.twitter.com/3jb4xb0H9g

— Jim Bianco (@biancoresearch) September 13, 2024

Surprisingly, this change coincided with a strong stock market, suggesting factors beyond economic stress are driving the new outlook.

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Why It Matters: The Wall Street Journal reported that Fed officials are weighing the merits of a traditional 0.25 percentage point cut against a larger 0.50% reduction.

The decision hinges on mixed economic data, concerns about prolonged high rates, and the need to balance cut pace with market expectations.

Fed officials are reportedly anxious about maintaining high interest rates for too long, potentially jeopardizing the desired “soft landing” scenario where inflation falls without significant job losses.

The upcoming Fed meeting on Sep. 17-18 is now viewed as a critical juncture for financial markets, with the size of any rate cut likely to have far-reaching effects on economic outlook and asset valuations.

What’s Next: Benzinga’s Future of Digital Assets event on Nov. 19 will explore these dynamics, offering insights into how evolving Fed policies intersect with the cryptocurrency and blockchain landscape.

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Image created using artificial intelligence with Midjourney.