Fed seen nearly as likely to cut rates by 50 bps as 25 bps
By Ann Saphir and Howard Schneider
(Reuters) -The Federal Reserve is nearly as likely to deliver an outsized interest-rate cut next week as a more-usual-sized reduction, trading in rate-futures contracts suggested on Friday, as financial markets priced in a bigger chance that the Fed will move more aggressively.
A quarter-point reduction at the Fed's Sept. 17-18 meeting is still seen as the slightly more likely outcome, but only marginally so.
Futures tied to the Fed's policy rate now reflect about a 47% chance that the Fed will cut its policy rate, currently in the 5.25%-5.50% range, by a half of a percentage point. That's up from about 28% on Thursday.
The market move reflects increasing bets by traders that the Fed may try to head off deterioration in the labor market, rather than take a slower see-what-happens-next approach with a smaller opening reduction.
"Our view is that the Fed is behind the curve - that it should have been easing from June even, or potentially May - and that now it needs to catch up and may have to front-load some of the rate cuts," Parthenon economist Gregory Daco said.
Fed Chair Jerome Powell last month said he would not want to see any further cooling in the labor market, and "the time has come" to cut rates.
Since then, other Fed policymakers have signaled their sympathy with that view, including San Francisco Fed President Mary Daly who said a weakening job market would be unwelcome. Fed Governor Chris Waller said he would support front-loading rate cuts should conditions merit.
Typically Powell spends the Thursday and Friday before a policy-setting meeting in half-hour one-on-ones with each of his fellow policymakers to discuss the options on the table and the economic conditions that may warrant one over another.
CHANGING SENTIMENT
The change in market sentiment amplifies a discussion that began in earnest at the Fed's July 30-31 meeting, when "several" policymakers said there was already a "plausible case" to cut rates, according to minutes of the session - a fact that may leave some officials now advocating for a bigger increase in September if they think the Fed should have cut already.
Within days of that meeting, the case grew even stronger when the employment report for July showed the jobless rate rising to 4.3% and employers adding a fewer-than-expected 114,000 new jobs - a slow pace by recent standards that was subsequently revised down to just 89,000. Revisions to benchmark data also showed job creation for the 12 months ending in March had been slower to the tune of 818,000 positions.