Federal Reserve Lowers September Rate Cut Likelihood to 21.8%

The Federal Reserve has significantly reduced the likelihood of implementing a rate cut in September, according to recent market analyses. This shift in sentiment comes amidst a backdrop of mixed economic indicators and evolving market expectations. Initially, market participants had priced in more than two quarter-point rate cuts for the current year, with the first anticipated move in September. However, recent economic data, particularly a robust job market, has led to a reassessment of these expectations.

Analysts had previously forecasted a high probability of a rate cut by September, with some even suggesting the possibility of multiple cuts throughout the year. For instance, some analysts had predicted three 25-basis-point cuts in September, October, and December, which would have brought the Fed funds rate to a range of 3.50% to 3.75%. Similarly, the CME FedWatch tool had indicated a 75.8% probability of a 25-basis point cut in September. However, these forecasts have been tempered by the latest economic developments.

The Federal Reserve's July rate decision is expected to hold steady, with a 4.9% probability of rates remaining unchanged, a 73.3% chance of a cumulative 25 basis point cut, and a 21.8% likelihood of a more significant reduction. This cautious approach reflects the Fed's commitment to carefully considering inflation and employment data before making any rate moves. Federal Reserve Chair Jerome Powell has emphasized that the Fed will not be pressured into early action, despite calls for significant rate reductions from various quarters.

The potential for an earlier rate cut has been influenced by ongoing tariff discussions and their limited inflationary impact. U.S. Treasury Secretary had suggested that the Federal Reserve might implement a rate cut by September or even earlier, citing the need to support economic growth amidst tariff uncertainties. However, the Fed's stance remains data-dependent, and recent economic indicators have not warranted an immediate rate cut.

Market participants have outlined several scenarios where the Federal Reserve might implement an earlier easing of monetary policy. These scenarios range from a 25 basis point reduction in the 2-year Treasury yield due to exceeding inflation expectations to a dovish policy stance combined with revised growth expectations. Across all scenarios, consistent trends include a decline in yields, a weakening of the dollar, and an increase in gold prices. The direction of the stock market and the strength of the dollar against other currencies would depend on the accuracy of growth expectations.

In summary, the Federal Reserve has significantly reduced the likelihood of a rate cut in September, reflecting a cautious approach to monetary policy amidst mixed economic indicators. While initial forecasts had suggested a high probability of a rate cut, recent economic data and the Fed's data-dependent stance have tempered these expectations. Market participants continue to monitor economic developments closely, with the potential for an earlier rate cut remaining a key focus.