Despite economic fluctuations and the U.S. presidential debate, financial markets including the tightly-aligned crypto market have remained relatively calm this week. Investors are laser-focused on the upcoming Federal Reserve meeting, where a rate cut is widely anticipated.

Anticipation of a 25 Basis Point Rate Cut Grows

The CME Group’s FedWatch tool shows an 87% probability that the market is betting on a 25 basis point rate cut at the September 18th meeting. This marks a noticeable jump from earlier this week when the odds were a bit lower. Conversely, the chance of a more aggressive 50 basis point cut has dropped to just 13%.

The consensus among investors regarding a rate cut points to growing optimism that the Federal Reserve will relax its monetary policy to spur economic growth and try to ward off a potential recession. Investor sentiment is supported by recent economic data, which, despite its mixed signals, suggests a slowing economy, making a rate cut appear more likely.

Market Volatility Declines, Powell Hints at Rate Cut

Meanwhile, options market activity has been relatively subdued, with implied volatility (IV) falling across major asset classes. This implies that investors are growing less worried about short-term market swings. This aligns with the overall theme of muted volatility that has been a hallmark of September.

Fed Chairman Jerome Powell recently acknowledged a “cooling in the labor market” and suggested an imminent rate cut. The precise timing and magnitude of the cut, however, will hinge on incoming data, the evolving economic outlook, and the balance of risks.

All Eyes on the Fed

As the Fed meeting draws closer, market participants will be keenly observing any signals of a shift in the central bank’s stance. Any surprising developments or statements from Fed officials could cause a change in rate-cut expectations and potentially stir up market volatility.

This week has seen a steady increase in the likelihood of a 25 basis point rate cut at the upcoming Fed meeting. While market volatility has remained low, investors will continue to scrutinize economic indicators and Fed communications for clues about the central bank’s future policy direction.