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The latest data from the CME's “Fed Watch” tool shows a shift in market expectations for the Fed's September interest rate decision.
Accordingly, the probability of a 25 basis point rate cut remained at a high rate of 75%, while the probability of a more aggressive 50 basis point cut decreased to 25%.
The change in forecasts comes after the latest inflation data revealed the slowest annual price increases since March 2021. While this positive development gave economists confidence in a September rate cut, it also sparked debate about the potential size of the cut.
The Federal Reserve has kept interest rates at record lows over the past year to curb spending and combat inflation. With inflation showing signs of easing from its peak in 2022, experts believe a change in the central bank’s restrictive policy may be necessary.
But central bankers have stressed that they need assurance that inflation is steadily approaching the 2% annual target before cutting rates to prevent a resurgence of price pressures.
St. Louis Fed President Alberto Musalem recently suggested that inflation is trending in the right direction and that the time for a rate cut is “nearby.” However, he did not explicitly mention plans for September.
*This is not investment advice.