Investors Betting On 50 Basis Point Rate Cut: Expert Says Market Pressure Could Sway Fed's Decision

Anticipation is growing among investors for a 50 basis point interest rate cut by the Federal Reserve, a move that could sway the central bank’s decision, says BMO‘s head of U.S. rates strategy.

What Happened: Investors are now factoring in a 63% likelihood of a 50 basis point cut, a significant increase from 34% last week. Ian Lyngen, BMO’s head of U.S. rates strategy, suggested that the Federal Reserve might be more inclined to implement a larger cut as market expectations continue to climb, Business Insider reported on Wednesday.

“The more aggressively the market prices in 50 bp, the more compelled the Fed will be to follow-through with such a move,” Lyngen expressed.

Lyngen posits that the odds need to hit 80% for the Fed to be persuaded to make a substantial initial reduction in its benchmark rate. He also mentioned the potential for disagreement within the Fed, which could alleviate market worries about the economic situation if a larger rate cut is implemented.

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While some analysts believe a 50 basis point cut could swiftly relax policy amidst a slowing labor market, others worry that such a drastic initial cut could incite a market sell-off due to recession fears.

The Fed’s decision is expected to be announced at 2 p.m. ET on Wednesday.

Why It Matters: Morgane Delledonne, head of investment strategy at Global X ETFs, highlighted there is a notable gap between the Federal Reserve’s objectives and market expectations. This disconnect could further complicate the Fed’s decision-making process.

Moreover, the market’s reaction to the Fed’s decision will likely depend on several factors, including any changes in the Fed's language in the post-meeting policy statement, the growth, inflation, and rate forecasts provided in the Summary of Economic Projections, and Chair Jerome Powell‘s comments during the subsequent press conference.

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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari