Investors are increasingly increasing their expectations that the FED will take a big step in reducing interest rates.

Federal funds futures markets on Thursday showed there is a roughly 23% chance the Fed will cut its key interest rate by at least 0.5 percentage points by September, according to data from CME Group. This rate indicates a significant increase compared to the rate of 10% the day before and 4.1% a week ago.

However, CME Group’s FedWatch tool puts the probability of a rate cut in July at only 5%. But he almost certainly predicts the possibility of a Fed cut in September, following Chairman Jerome Powell’s Jackson Hole speech in late August.

The expectation of a significant rate cut likely stems from Powell’s need to build broad consensus among policymakers. Dudley, a leading analyst, argues that Powell is concerned that last year’s pause in progress on inflation could be repeated in the back half of 2024.

Interestingly, Fed officials do not seem particularly bothered by the risk that the unemployment rate will soon exceed the Sahm Rule threshold. Sahm’s Rule, developed by economist Claudia Sahm, suggests that recession risks depend on a 0.5 percentage point increase in unemployment.

*This is not investment advice.