Half-point or quarter? Traders divided on Fed's next cut

Traders are already placing record bets on whether another half-point rate cut is in the cards in November
By Meagan Faryna
•
27 September 2024
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Wall Street

Traders are split down the middle on whether to expect another hefty half-point rate cut from the Federal Reserve in November.

The swaps market, where traders bet on future interest rates, is pricing in a total of 75 basis points in cuts for the Fed's remaining two meetings this year. This even split suggests traders see equal odds of either a big cut followed by a small one, or three smaller cuts spread over time.

Recent weak consumer confidence data has muddied the waters, leaving traders uncertain about the Fed's next move. Some believe the Fed might opt for a larger cut to boost the economy, while others expect a more cautious approach.

"We're increasingly in that 50-basis-point camp," said Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston. "Although officially we haven't changed our stance, which is two quarter points this year — so one in November and one in December."

Treasury futures and bond yields signal rate cut expectation

Interest in two-year Treasury note futures, which closely track expectations of the Fed's rate path, has climbed sharply.

Traders have taken positions in about 4.4 million contracts for delivery in December 2024, the highest level yet. In simpler terms, this means a record number of investors are placing bets on where they think interest rates will be in late 2024.

The bond market has also responded to this uncertainty.

The yield on the 10-year Treasury note, a key indicator of long-term interest rates, increased by 0.12 percentage points to 3.73% in the week through September 23. This rise suggests investors are anticipating higher long-term rates, which often occurs when they expect the Fed to cut short-term rates.

Data from JPMorgan shows that Treasury investors maintained steady long positions, indicating a belief that rates will continue to fall. Both asset managers and hedge funds are also positioning themselves for more rate cuts.

Fed officials send mixed signals

Fed officials aren't making the picture any clearer, as they're expressing different views on the path forward.

Fed Governor Michelle Bowman advocated for a "measured" pace of rate cuts on Tuesday. "I expect it will be appropriate for the FOMC to reduce the target range for the federal funds rate later this year," Bowman stated, emphasizing a cautious approach.

This statement came after two other officials downplayed the odds of a half-point cut the day before. In contrast, Chicago Fed's Austan Goolsbee argued that rates need to be lowered "significantly."

Goolsbee pointed to the recent economic data, saying, "We've had very good news on inflation... that opens up the possibility of rate cuts."The next Federal Reserve meeting will be held on November 7, followed by another on December 18 to wrap up the year."

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