^{Photo: CBS Austin}

As Wall Street gears up for the Federal Reserve’s September 17 meeting, most traders are betting on a quarter-point interest rate cut — but they aren’t ruling out the possibility of a deeper half-point reduction.

Market Odds Strongly Favor a Quarter-Point Cut

According to CME Group’s FedWatch tool, futures markets put the probability of a 25 basis point (0.25 percentage point) cut at around 88% as of Monday afternoon. That leaves just a 12% chance of a more aggressive 50 basis point cut, a scenario last seen in September 2024. Virtually no one expects the Fed to hold rates steady.

Weak Jobs Data Fuels Calls for Easing

The shift toward rate-cut expectations intensified after the latest labor market data. August nonfarm payrolls rose by just 22,000 — a sharp slowdown compared to previous months — while the unemployment rate climbed to 4.3%, its highest level in nearly four years.

“The soft August jobs report will help drive consensus across the committee that not only should rate cuts resume this month, but that further cuts will likely be appropriate in coming months,” wrote Citigroup economist Andrew Hollenhorst.

Citi forecasts that the Fed could cut rates at five consecutive meetings, prioritizing labor market weakness over lingering inflation.

Debate Inside the Fed

Not all policymakers agree on the size of the move. Economists point to Fed Governors Michelle Bowman and Christopher Waller, along with potential new governor Stephen Miran, as voices that might support a half-point cut. Still, the majority appears inclined toward a smaller adjustment.

Nomura economist David Seif argued that “insurance cuts” will likely define the Fed’s next steps, with policymakers balancing inflation risks against slowing job growth.

Balancing Inflation and Employment

The Fed’s dilemma is sharpened by its dual mandate of maintaining stable prices and maximum employment. Inflation remains above target, with economists surveyed by Dow Jones expecting headline CPI to rise to 2.9% and core inflation to hold at 3.1%.

“In the worst case, if inflation surprises to the upside, it will really make it tricky,” Apollo economist Torsten Slok said. “How does the Fed do policymaking when one side of the mandate says cut and the other says hike?”

Slok believes the Fed will increasingly emphasize inflation expectations rather than current inflation readings, keeping its bias toward easing even if price pressures prove sticky.

What Comes Next

Current market consensus is for a September cut, a pause in October, and another reduction in December. That would continue a cautious easing cycle, balancing the risk of overtightening against fears of reigniting inflation.

With the final inflation readings due this week, traders will be watching closely. A stronger-than-expected CPI print could cement the quarter-point move, while a softer reading may rekindle talk of a half-point cut.

For now, the odds remain firmly tilted toward a modest 25 basis point reduction — but in an uncertain economy, surprises can’t be ruled out.