The Blubber

Traders are now 100% certain that the Federal Reserve will cut interest rates by September.

According to the CME FedWatch tool, there are currently 93.3% odds that the Fed’s target range for the federal funds rate will be lowered by a quarter percentage point to 5% to 5.25% in September, down from the current 5.25% to 5.50%. Additionally, there are 6.7% odds that the rate will be a half percentage point lower in September, reflecting some traders' belief that the central bank will cut at its meeting at the end of July and again in September. Together, these probabilities sum up to 100%.

The catalyst for this change in odds was the recent consumer price index update for June, which showed a 0.1% decrease from the previous month. This brought the annual inflation rate down to 3%, the lowest it has been in three years. A month ago, the odds of a rate cut in September were around 70%.

The CME FedWatch Tool calculates these probabilities based on trading in fed funds futures contracts at the exchange, where traders place bets on the level of the effective fed funds rate in 30-day increments. This is a reflection of where traders are putting their money. While the real-life probability of rates remaining where they are today in September is not zero percent, the data indicates that no traders are willing to bet money on rates staying the same.

Fed Chairman Jerome Powell’s recent comments have also reinforced traders' belief that the central bank will act by September. On Monday, Powell stated that the Fed wouldn’t wait for inflation to reach its 2% target before starting to cut rates, due to the lag effects of tightening.

The Fed is looking for "greater confidence" that inflation will return to the 2% level, Powell said.

“What increases that confidence is more good inflation data, and lately here we have been getting some of that,” added Powell.

The Fed will next decide on interest rates on July 31 and again on September 18. It does not meet on rates in August.