Wall Street is poised for a higher open as traders increasingly bet on a larger interest rate cut from the Federal Reserve. Recent data showing a cooling in inflation has fueled expectations that the Fed will move to cut rates, possibly by as much as 50 basis points during its upcoming September meeting.
The growing anticipation follows the release of key economic indicators. The consumer price index (CPI) showed its lowest level of inflation since February 2021, while wholesale prices also reflected a decline in inflationary pressures. These developments signal to many investors that the Fed’s aggressive rate hikes over the past two years, which brought interest rates to their highest in two decades, may finally be coming to an end.
Investors are now speculating whether the Fed will opt for a 25 or 50 basis point cut. The odds of a larger cut surged after the release of weaker-than-expected labor market data, which further signaled that the economy might need a more accommodative monetary policy to avoid recession. Markets in Asia and Europe have also shown positive movement in response to these expectations, reflecting a global optimism that U.S. monetary policy is shifting toward easing.
This change in sentiment is also driven by traders using the CME FedWatch tool, which shows a substantial probability of a rate cut, with some projecting up to 43% odds for a larger-than-expected cut. A Fed rate reduction could alleviate borrowing costs and support higher stock valuations, contributing to the recent rally in equity markets.
