Traders' uncertainty about the upcoming Federal Reserve decision has reached its highest level since 2007, with the market split on whether the Fed will cut rates by a quarter-point or half-point. This level of indecision is rare, only surpassed by the emergency rate cut in March 2020 during the pandemic.
Fed officials have hinted at a rate cut, but there's no consensus on the size, with some, like Rabobank’s Philip Marey, expecting a quarter-point reduction. However, former New York Fed president Bill Dudley has suggested a larger half-point cut. The interest-rate swap market is pricing in a 37-basis-point reduction, indicating a split between the two possibilities.
Yields on two-year Treasuries fell to 3.55%, widening the gap with 10-year yields. Meanwhile, the dollar index dropped 0.4% on Monday, as traders anticipate further rate cuts, signaling a potential cyclical decline for the dollar.
Political pressure is also mounting, with some senators advocating for an aggressive rate cut to shield the economy from potential harm. With limited guidance from Fed officials, all eyes are on upcoming economic data, particularly retail sales, ahead of the Fed’s final decision.