Key Takeaways
- Prediction markets indicate a near-certainty that the US Federal Reserve will hold interest rates steady in July, but assign a significant and fluctuating probability of a 25-basis-point cut at the September meeting.
- A comparison with the CME FedWatch Tool reveals a similar, though not identical, sentiment among institutional traders, underscoring that September is the first truly “live” meeting for a potential policy pivot in 2024.
- This split outlook is a direct consequence of conflicting economic data: stubbornly persistent inflation is pitted against emerging signs of a cooling labour market and slowing consumer activity.
- The current environment suggests a cautious approach for asset allocators, with the period between now and the September decision likely to be dictated by key inflation and employment data releases, which could introduce significant volatility.
The consensus forming in financial markets is one of patience, followed by a pivot. Prediction markets, which offer a real-time gauge of sentiment, are pricing an exceptionally high probability that the Federal Reserve will maintain its current policy stance at its July meeting. Yet, attention is already shifting to September, where the odds of a 25-basis-point rate cut are becoming material, reflecting a market grappling with the dual pressures of persistent inflation and a potentially softening economy.
September Becomes the Battleground
While a July hold appears to be a foregone conclusion, September is shaping up to be the first genuine decision point for the Federal Open Market Committee (FOMC) in 2024. The period between the two meetings will provide several crucial data points, including two more reports on both consumer prices and employment. This gives the committee the necessary runway to assess whether the disinflationary trend is reasserting itself or if the labour market is weakening more rapidly than anticipated.
Prediction markets, such as Polymarket, provide a clear view of this evolving expectation. The odds reflect a belief that while one more meeting may be needed to confirm the trajectory, the conditions for a marginal policy easing could well be in place by the end of the third quarter.
| FOMC Meeting Date | Polymarket Implied Probability (No Change) | Polymarket Implied Probability (25 bps Cut) |
|---|---|---|
| 31 July 2024 | ~90% | ~10% |
| 18 September 2024 | ~40% | ~58% |
Note: Probabilities are dynamic and reflect data from Polymarket as of late July 2024. They are subject to change.
The Institutional Viewpoint
It is instructive to compare the sentiment in these more retail-oriented prediction markets with the institutional benchmark, the CME FedWatch Tool, which derives its probabilities from trading in the Fed Funds futures market. Here, the outlook is broadly similar, lending credibility to the September pivot narrative. While the precise percentages may differ, both markets point to September as the key inflection point.
The CME tool currently indicates a probability of a rate cut in September that is comfortably above 60%, a significant increase from just a month prior. This convergence between two different market ecosystems suggests a robust and widely held consensus. The slight divergence in odds can often be attributed to different participant profiles; prediction markets can react more swiftly to headlines and political commentary, whereas futures markets tend to be anchored more rigidly to institutional flows and economic modelling.
The Data Driving the Decision
The market’s divided focus is not irrational; it is a mirror of the economic crosscurrents facing policymakers. On one hand, core inflation, while trending lower, remains stubbornly above the Fed’s 2% target. This argues for maintaining a restrictive policy stance for longer to ensure inflationary pressures are fully extinguished.
On the other hand, there are clear signs of economic moderation. The labour market, while still healthy by historical standards, has shown signs of rebalancing. Job openings have declined, and the unemployment rate has drifted slightly higher. Furthermore, retail sales and other consumer metrics suggest that households are beginning to feel the strain of higher borrowing costs and depleted savings, which could translate into weaker aggregate demand ahead.
The Fed is therefore engaged in a delicate balancing act. Moving too early risks reigniting inflation, while waiting too long risks triggering an unnecessary economic downturn. The odds for September reflect the market’s belief that by then, the data will have tilted decisively enough in favour of the latter risk to warrant a pre-emptive easing.
A Contrarian Takeaway
For investors, this environment demands a nuanced approach. The prevailing uncertainty suggests that volatility may remain elevated, particularly around key data releases. Positioning for a binary outcome seems imprudent. Instead, a balanced portfolio that can withstand either a prolonged hold or a dovish pivot may be the most sensible strategy.
However, here lies a potential contrarian thought: the market is almost exclusively focused on the timing of the *first* 25-basis-point cut. The truly asymmetric risk may not be whether the cut happens in September or November, but the potential for a more significant economic deterioration that forces the Fed’s hand more aggressively. Should the upcoming employment data reveal a sharp and unexpected crack in the labour market, the debate could rapidly shift from ‘if’ they will cut to ‘how much’. A scenario requiring a 50-basis-point “insurance cut” is not currently priced in, and were it to materialise, it would likely trigger a far more dramatic repricing across all asset classes than the gentle pivot markets are currently anticipating.
References
- Polymarket. (2024). What will the target range of the Fed Funds Rate be after the July 2024 FOMC meeting? Retrieved from https://polymarket.com/event/fed-interest-rates-july-2024
- Polymarket. (2024). What will be the target range of the Fed Funds Rate after the September 2024 FOMC meeting? Retrieved from https://polymarket.com/event/fed-interest-rates-september-2024
- CME Group. (2024). CME FedWatch Tool. Retrieved from https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
- Benzinga. (2024, July). Polymarket Bettors See 50% Chance Of Fed September Rate Cuts As Trump Turns Up Heat On Powell. Retrieved from https://www.benzinga.com/crypto/cryptocurrency/25/07/46314139/polymarket-bettors-see-50-chance-of-fed-september-rate-cuts-as-trump-turns-up-heat-on-powell
