Traders increase bets on super-sized Fed rate cut

STORY: Traders on Monday increased bets that the U.S. Federal Reserve will deliver a larger, half-point interest rate cut at the conclusion of its pivotal policy meeting this week.

Futures on the fed funds rate now show a 60% chance of a 50-basis point cut.

That's up from a mere 25% less than one week ago, when most traders believed the Fed would deliver a smaller, quarter-point cut.

The federal funds rate is the interest rate banks use when lending money to each other overnight.

It serves as a benchmark for broader interest rates.

The central bank began hiking interest rates from near-zero levels in early 2022 to tame decades-high inflation.

With the annual inflation rate having dropped from a peak of 9% to roughly 3%, the Fed can now start to lower borrowing costs.

By exactly how much has been the subject of swaying bets between 50 and 25 basis points.

One strategist told Reuters that a larger rate cut could actually affect perception of the Fed more than it would the economy itself, as investors may believe the Fed is more concerned about a recession than it has previously indicated.