(Bloomberg) -- Traders added to bets the Federal Reserve will cut interest rates three times this year after Goldman Sachs Group Inc. said conditions were ripe for easing.
Two quarter-point rate reductions are fully priced in for 2024, with market-implied odds of a third cut reaching about 60% on Monday. The first move is widely expected in September, though Goldman Sachs economists said they “see a solid rationale” for officials to lower rates as soon as July.
Softer-than-expected employment and inflation data for June had already been fueling expectations for rate cuts. As of Friday, December contracts whose settlement value is based on the Fed’s policy rate was about 4.71%, pricing about 62 basis points of easing — two quarter-point cuts and almost half of a third one.
On Monday, the contract’s rate briefly fell below 4.66%, pricing in more than 60% odds of a cut. The decline accelerated after a team led by Jan Hatzius, Goldman’s chief economist, said recent data justifies a July reduction. The bank still forecasts a first move in September.
Contributing to the repricing was persistent demand for October federal funds futures contracts. Volume in the contract reached a record level on Thursday and has remained elevated. Several block trades in the contract have been done at prices that assume a quarter-point rate cut — if not a half-point cut — when Fed policymakers meet in September.
Fed Chair Jerome Powell in a public appearance Monday reiterated that recent data have given the central bank confidence that inflation is on a path back toward its 2% goal, possibly paving the way for rate cuts, but that he wouldn’t send signals on any particular meeting. The Federal Open Market Committee’s next meetings conclude on July 31, Sept. 18, Nov. 7 and Dec. 18.
The anticipated quantity of Fed easing remains well below where it began the year. At that time, expectations for an economic slowdown were widespread, and interest-rate contracts priced in at least six quarter-point cuts by year end.
--With assistance from Edward Bolingbroke.
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