Investors are now fully convinced that the FED will cut interest rates by September. According to the CME FedWatch tool, there is a 93.3% chance that the target range for the federal funds rate, the Fed's key interest rate, will be reduced by a quarter point to 5% to 5.25% in September from its current level of 5.25% to 5.50%.
In addition, there is also a 6.7% bet that the interest rate will be half a point lower in September. This explains some investors' belief that the central bank will cut interest rates at its meetings in late July and September. When combined, these possibilities mean 100% certainty.
The change in possibilities was triggered by the June consumer price index update, which was announced last week and showed a 0.1% decrease compared to the previous month. Thus, the annual inflation rate dropped to 3%, the lowest level of the last three years. A month ago, the probability of interest rates being reduced in September was around 70%.
The CME FedWatch Tool calculates these probabilities based on trades in futures contracts on the exchange. This reflects where investors place their bets on the level of the effective fed funds rate in 30-day increments. In essence, this is a reflection of where investors put their money. In real life, the probability that interest rates will remain where they are today in September is not zero percent. But this just goes to show that no investor is willing to risk their real money on this one.
The FED's next decisions on interest rates will be taken on July 31 and September 18. There will be no meeting on interest rates in August.
*This is not investment advice.