The probability of a 50 basis point (bps) interest rate cut from the Federal Reserve in September has significantly decreased following Wednesday’s hotter-than-expected core CPI reading. However, traders are still pricing in a 100% probability of a rate cut, but they are now looking more toward a smaller 25 bps cut.
The probability of a 50 bps rate cut now stands at just 12%, a sharp decline from the previous day’s probability of 34% and last week’s probability of 38%. On the other hand, the likelihood of the Federal Reserve cutting 25 bps has risen. The current probability of a 25 bps cut is 88%, up from 66% the previous day and 62% the previous week.
These probabilities are based on the CME Group’s (NASDAQ:CME) 30-Day Fed Fund futures prices, which reflect market expectations of changes in the U.S. Federal Reserve’s interest rate.
Earlier Wednesday, the core CPI, which excludes food and energy, edged up by 0.3% month-over-month, faster than estimates of 0.2%. The headline CPI rose 0.2%, which was in-line with estimates.
Traders and investors will closely watch the September 18th meeting of the Federal Reserve, and nearly all market participants expect Fed Chairman Jerome Powell to follow through on his promise of a rate cut.
“The time has come for policy to adjust,” Powell said in his Jackson Hole speech in August. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
