Traders Betting On Big Fed Rate Cut In September

Bond traders are ramping up bets that the Federal Reserve will cut interest rates by half a percentage point in September instead of the standard quarter-point increment, Edward Bolingbroke reported for Bloomberg News.

Any buying at higher price levels implies an expectation that more people will buy into the idea that the Fed could begin its first easing cycle in years with a supersized move.

That’s evident in the federal funds futures market, where softer-than-anticipated inflation data released Thursday morning unleashed a wave of buying of October contracts, which continued on Friday.

Expiring Oct. 31, the contracts already fully price in a quarter-point rate cut at policymakers’ Sept. 18 meeting.

Any buying at higher price levels implies an expectation that more people will buy into the idea that the Fed could begin its first easing cycle in years with a supersized move.

“The Fed is very well-placed to potentially cut in September,” said Marilyn Watson, head of global fundamental fixed-income strategy at BlackRock Inc., on Bloomberg TV. While she expects a quarter-point cut, “we think they’ll probably tee things up potentially in July. We know that the Fed has been very, very data dependent.”

The positions would also benefit from an increase in expectations for quarter-point rate cuts on both July 31 and Sept. 18, but traders abandoned hope for a July rate cut weeks ago, and no major Wall Street bank is predicting one.