Market Sentiment Shifts: 91.8% Odds Now Pricing in a 25 Basis Point Cut by Federal Reserve in September

Following the latest CPI release on August 12, CME’s Fed Watch tool shows a dramatic uptick in trader confidence regarding an imminent rate reduction. The probability of a 25 basis point cut in September has surged to 91.8%, with just an 8.2% chance of the Federal Reserve holding rates steady. This represents a significant jump from the pre-CPI expectations of 82.5%, signaling how responsive markets are to inflation data.

Decoding the Full Rate-Cut Scenario

Beyond September’s immediate outlook, the probability landscape reveals traders’ broader expectations. If policymakers hold in September, there’s only a 2.2% likelihood they’ll maintain rates through October. However, most traders are positioned for action: a 31% probability suggests a cumulative 25 basis point cut, while the dominant scenario—66.7% probability—prices in a 50 basis point cumulative reduction over the coming months.

What’s Driving the Conviction

The swing from 82.5% to 91.8% reflects how the CPI data has tipped the scales in favor of rate cuts. With the Federal Reserve scheduled to meet on September 17 and again on October 29, traders are essentially betting that the central bank will move decisively in September, with strong positioning for additional cuts as the year progresses through December.

This growing consensus suggests market participants are increasingly confident the inflation picture has cooled enough to warrant monetary easing.