BlackRock Research: The Fed is Expected to Begin Cutting Rates in September, with a Rational Basis for a 50 Basis Point Cut

BlockBeats News, August 13th. For several weeks, investors have been pouring into swap contracts, options, and direct long positions on US treasuries, betting that the slowdown in inflation will allow the Federal Reserve to lower borrowing costs in the coming months. This view received preliminary validation on Tuesday: following the release of July inflation data, short-term US Treasury yields fell in response, while swap traders increased the probability of a rate cut in September to 90%.

More notably, the market's bet on a rate cut by the Federal Reserve in September exceeding 25 basis points is also heating up. Traders on that day added approximately $2 million in option premiums to their secured overnight financing rate (SOFR)-related positions, which will profit from a larger-than-expected rate cut.

"Despite today's (Tuesday's) inflation data being slightly stronger than the previous few months, it is far below the worry levels of many," said Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, in a research report. "Therefore, we expect the Federal Reserve to begin lowering rates in September, and there is even a reasonable basis for a 50 basis point rate cut."

In addition, Goldman Sachs' trading and research team had previously stated that the market was underestimating the possibility of a 50 basis point rate cut by the Federal Reserve in September. (FX678)