Stay informed with free updates

Simply sign up to the US interest rates myFT Digest — delivered directly to your inbox.

Wall Street has raised its wager on the Federal Reserve making an aggressive half-point cut to US interest rates when it meets this week, with traders now putting the odds of a jumbo cut at about 64 per cent.

Since late last week, investors in the futures market have steadily ramped up expectations of a bigger cut from central bank officials at this week’s meeting concluding on Wednesday — rather than the more traditional 0.25 percentage point change.

The increased expectations come in the wake of US economic data that has shown the labour market slowing and inflation cooling. The Financial Times and The Wall Street Journal reported last week that the Fed was facing a close call on whether to cut rates by a quarter point or half point.

“This is going to be a very close call, but I think the Fed should cut by 0.5 percentage points,” said Andy Brenner, head of international fixed income at NatAlliance. “Granted, I thought the Fed should have cut rates in June and July.” He noted retail sales data to be released on Tuesday was expected to be weak and that could help cement the case for a bigger cut.

JPMorgan economists last week also reiterated their call that they expected the Fed to cut interest rates by 0.5 percentage points this week.

Just last Wednesday, traders in the futures market were only pricing in an 18 per cent chance of a half-point cut. 

The chances of a big rate cut have helped juice returns in the stock market. The blue-chip S&P 500 hovered just below record highs on Monday and on Friday recorded its best weekly return this year. The Dow Jones Industrial Average on Monday hit record intraday and closing highs. 

Still, some experts were cautious about the likelihood of a dramatic move from the Fed, which could be interpreted by the market as a signal that central bankers are concerned about the state of the US economy. 

“Since Friday, the market has been leaning towards a 0.5 percentage point rate cut, though our house view is that the Fed will cut by 0.25 percentage points,” said Subadra Rajappa, head of US rates strategy at Société Générale. “The Fed tends to deliver what is fully priced in by the market, so given that track record, I still believe a 0.25 percentage point cut is more likely.”

A slowdown in the US labour market, evident in the past two monthly jobs reports, has helped make the case for a rate cut this week, which would be the first since 2020. The US added fewer jobs than expected in August, and July’s report was far weaker than expected, sparking concerns the country was headed for a recession. 

Also helping drive the market’s conviction was a report last week that headline US inflation fell to 2.5 per cent, bringing it closer to the Fed’s target, though core inflation rose more than expectation in part due to price pressures in the housing market.