Markets Are Certain: A Rate Cut Is Coming

All eyes will be on Washington, D.C. this week, where the Federal Open Market Committee comes together on Tuesday and Wednesday to discuss and vote on the course of monetary policy. After Jerome Powell's speech in Jackson Hole last month, where the Fed chair signaled a possible policy shift, it is widely expected that the Fed will announce the first rate cut since December 2024, the only remaining question being how deep the cut will be.

Fed officials are currently facing a dilemma as weakening labor market data coincides with sticky, upward trending inflation – the former calling for rate cuts and the latter demanding continued caution. In the past, Powell has suggested that he would err on the side of caution in this case, as he considers price stability the prerequisite for strong labor market conditions, but in his Jackson Hole speech he suggested that the current outlook "may warrant" an adjustment to the Fed's policy stance, which convinced markets that a rate cut was almost definitely coming.

The economic data that came out since pointed in the same direction, with a weak August jobs report and a softer-than-expected PPI reading enough to eliminate any remaining doubts. According to the CME FedWatch tool, markets have priced in a 95-percent chance of a 25-point cut this week, with a 5-percent chance given to an even steeper 50-point cut. Considering last week's Consumer Price Index report, which showed an uptick in inflation, this outcome seems highly unlikely at this point, though.