Prediction markets anticipated interest rate cuts ahead of the Federal Open Market Committee’s (FOMC) September meeting. The only question was by how much.
On Wednesday, Sept. 18, Federal Reserve Chair Jerome Powell delivered an answer. To the delight of traders who had bet on an aggressive cut, the Fed voted 11-to-1 in favor of reducing interest rates by half a percentage point.
This slash comes as the Fed aims to balance its dual mandate of maximum employment and price stability amid signs of slowing inflation and a cooling labor market.
It was the first time since 2020 that the Fed reduced rates, as the Fed has been busy taming inflation following an era of cheap money.
While Powell doesn’t expect that era to return anytime soon, Wednesday’s announcement — which was more aggressive than many expected but not as aggressive as a handful of senators had requested — is only the beginning of a series of cuts as the Fed claims victory over inflation and shifts its focus to a new enemy: unemployment.
Market reactions and predictions
Entering the week, traders on Kalshi forecasted a 56% chance for a half-point cut. Polymarket was close behind at 55%. Both platforms showed a 1-2% chance for no cuts.
Among exchanges, the CME Group, one of the largest derivatives marketplaces in the world, came out on top. The CME FedWatch Tool put a 50bps cut at 63% and ruled out inaction from the Fed.
Preview of tomorrow's FOMC decision from various markets, from @CMEGroup @Polymarket @Kalshi pic.twitter.com/vOAup02BR0
— Blake Law (@blakelawga) September 16, 2024
In any case, so much uncertainty within hours of an FOMC meeting is unusual.
Central bankers observe a 10-day “blackout period” before each meeting, during which they refrain from making public statements about monetary policy. However, there’s usually a confident market consensus generated by predictions from investors, economists and other experts using news and economic data in the lead-up to these meetings.
What's next?
More cuts. With only two Fed meetings left on the 2024 FOMC calendar, Kalshi traders predict a 44% chance of at least one more 50bps cut this year and expect interest rates to fall to between 4.5-4.75%.
Kalshi traders see significantly more rate cuts on the horizon pic.twitter.com/8jrLtGichU
— Kalshi (@Kalshi) September 18, 2024
Unemployment. September’s unemployment forecast has more than doubled from 1.9%, when the month started, to 4.3% on Sept. 19. The cooling of the job market was one of the motivations behind the large cut, and why some economists were critical of the FOMC’s cautious approach in August.
Recession? The odds of a recession by 2026 have climbed from 40% at the end of August to a virtual coin flip as of mid-September. The Fed’s announcement had little impact. The good news is there’s less to fear in the short term, with only an 8% chance of a recession by this year’s end.
Could Fed's major rate cut boost Harris' election odds
While the Fed is independent and apolitical, some observers, including former President Donald Trump, have suggested that the Fed might make a politically motivated decision to lower rates even if it’s “something they know they shouldn’t be doing.”
Ironically, Trump previously said that presidents should have more influence over monetary policy, a stance that has raised concerns among economists about maintaining central bank independence.
There’s no reason to believe the Fed’s decision was influenced by anything other than the state of the economy, but that doesn’t mean it won’t affect the election.
Kamala Harris did get a small bump in her election prices on Polymarket, moving from 50 to 52 cents between 8 AM and 8 PM on Sept. 18.
Harris and Trump react
Predictably, Harris and Trump offered contrasting responses to the Federal Reserve’s decision.
Harris welcomed the rate cut as positive news for Americans, emphasizing her continued focus on addressing economic challenges. In a press release, she said, “While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down”
Trump, on the other hand, blew off the rate cut as a sign of economic weakness. Speaking at an event in New York, he stated that the Fed’s decision was either a response to a “very bad” economy or that it had been “playing politics.”
NEW: 🇺🇸 Donald Trump on the rate cuts - “It shows the economy is very bad that they cut by that much.”
— Bitcoin Magazine (@BitcoinMagazine) September 19, 2024
Just after making his first #Bitcoin transaction pic.twitter.com/phnYFZcnb7
With unemployment on the rise and recession fears looming, the true impact of the Fed’s decision may take months to unfold, leaving both traders and politicians bracing for what comes next.
Whether or not the Fed’s actions sway voters, the intersection of monetary policy, politics, and the economy is likely to remain a focal point as the election draws nearer.
