Markets Shift to Expect Larger Fed Rate Cut

Early this week, following the release of the US CPI report, the market was almost certain that the Federal Reserve would cut interest rates by a modest 25 basis points this month. However, the situation took a sharp turn on Thursday.

Former New York Fed President Dudley suggested that the Fed has reasons to cut rates by 50 basis points next week. Journalists at the Wall Street Journal, often dubbed the “Fed Whisperer,” and the Financial Times reported that the Fed is facing a difficult decision between a 50 basis point and a 25 basis point rate cut. Following these reports, market bets on a larger rate cut next week significantly increased, now reaching a near 50/50 split.

Next week will see a number of key events:

• Monday 20:30: US September New York Empire State Manufacturing Index
• Tuesday 20:30: US August Retail Sales Month-over-Month
• Wednesday 14:00: UK August CPI Month-over-Month, UK August Retail Price Index Month-over-Month
• Thursday 2:00: Fed releases interest rate decision and economic projections
• Thursday 2:30: Fed Chair Powell holds a monetary policy press conference
• Thursday 20:30: US Initial Jobless Claims for the week ending September 14, US September Philadelphia Fed Manufacturing Index
• Friday 11:00: Bank of Japan releases interest rate decision
• Friday 14:30: Bank of Japan Governor Kazuo Ueda holds a monetary policy press conference