Traders are certain at this point that by September, the Federal Reserve will be cutting interest rates.
The CME FedWatch tool stated that the odds of the Fed's target range for the federal funds rate being lowered by 0.25% in September, from the current 5.25% to 5.50% to 5% to 5.25%, are 93.3%. The odds that the rate will be lowered by a half percentage point are 6.7%, accounting for traders who believe the central bank will cut rates at both the July and September meetings. Combined, these percentages yield 100% odds.
The change in odds was driven by last week's announcement of the consumer price index update for June, showing a decrease of 0.1% and placing the annual inflation rate at 3%, the lowest in three years.
A month ago, the odds of a rate cut were at 70%.
According to CNBC, the CME FedWatch Tool bases its probability computations on trading in fed funds futures contracts. Traders place bets on the level of the effective fed funds rate in 30-day increments, reflecting where traders are putting their money.
Currently, the real-life probability that rates will remain where they are in September is virtually zero, indicating no traders are betting on rates staying the same.
Fed Chairman Jerome Powell recently gave hints that also strengthened traders' belief that the central bank will act by September.
Powell said on Monday that the Fed would not wait for inflation to reach the 2% target before starting to cut rates, considering that tightening has its effects.
"What increases that confidence is more good inflation data, and lately we have been getting some of that," said Powell, according to AOL.
He also stated that the Fed is optimistic and more confident about returning to the 2% level.
