Traders are now 100% certain that the Federal Reserve will cut interest rates by September. This consensus is based on data and projections derived from the CME FedWatch Tool, which monitors the trading of federal funds futures contracts. According to the tool, there is a 93.3% probability that the Fed’s target range for the federal funds rate, its key interest rate, will be lowered by a quarter percentage point to 5.00% to 5.25% in September from the current range of 5.25% to 5.50%. Additionally, there is a 6.7% probability that the rate will be a half percentage point lower in September, suggesting that some traders believe the central bank will cut rates both at the end of July and again in September. Together, these probabilities culminate in the 100% certainty among traders.

The catalyst for this shift in expectations was the recent consumer price index (CPI) update for June, which revealed a 0.1% decrease from the previous month. This reduction brought the annual inflation rate to 3%, the lowest it has been in three years. Prior to this data, the odds of a rate cut in September were about 70% a month ago, indicating a significant change in market sentiment following the CPI release.

The CME FedWatch Tool calculates these probabilities by analyzing trading activities in fed funds futures contracts on the exchange. These contracts reflect traders' bets on the level of the effective federal funds rate in 30-day increments. Therefore, while the actual probability of rates remaining at their current level in September may not be zero, the absence of any trader willing to place money on that outcome underscores the market's strong conviction that a rate cut is imminent.

Federal Reserve Chairman Jerome Powell's recent comments have further reinforced traders' expectations of a rate cut by September. On Monday, Powell indicated that the Fed would not wait for inflation to reach its 2% target before considering rate cuts due to the lagging effects of monetary tightening. He emphasized the need for "greater confidence" that inflation will return to the 2% level, noting that recent inflation data has been promising in this regard. "What increases that confidence is more good inflation data, and lately here we have been getting some of that," Powell said.

The Federal Reserve has scheduled its next interest rate decisions for July 31 and September 18, with no meeting planned for August. These upcoming meetings are crucial, as traders and analysts will be closely watching for any signals or actions from the Fed that align with the prevailing market expectations of a rate cut. Given the current economic indicators and the Fed's communication, the market's anticipation of a rate reduction by September appears well-founded.