Barclays predicts the Federal Reserve’s Federal Open Market Committee (FOMC) will initiate rate cuts this month, with three total envisaged for 2025. This expectation is driven by cooling in the US labour market, increasing anticipation for reduced rates. They anticipate the first cut will be 25 basis points, though some market participants speculate a half-point reduction.
Three cuts are expected this year, one at each remaining Federal Reserve meeting. Barclays does not foresee 50-basis-point reductions unless inflation falls to unusually low levels. Price pressures are expected to resurface as tariffs gradually impact consumer costs, posing a challenge for the Fed in balancing weaker job growth with inflation risks.
Upcoming FOMC Meeting
The Federal Open Market Committee (FOMC) is set to convene on September 16 and 17.
With the Federal Open Market Committee meeting just days away on September 16-17, we see derivatives markets have almost fully priced in a rate cut. Fed funds futures currently imply around an 85% probability of a 25-basis-point reduction, making this the baseline expectation for most traders. However, a small but notable portion of the market is positioned for a more aggressive 50-basis-point move.
This conviction for easing stems from the significant cooling we have observed in the labor market. The August jobs report showed non-farm payrolls grew by a less-than-expected 150,000, while the unemployment rate ticked up to 4.1%. In response, traders should consider strategies that benefit from falling interest rates, such as long positions in Treasury futures.
The primary risk to this dovish outlook is the sticky inflation we have seen, with the last Consumer Price Index reading holding at 3.4% year-over-year. This creates a dilemma, as tariffs could reintroduce price pressures and make the Fed hesitant to commit to a series of cuts. Some traders are therefore using options on commodity ETFs or interest rate floors to hedge against a “hawkish cut,” where the Fed lowers rates but signals a pause.
Market Reactions and Future Outlook
Given the uncertainty over the size of the cut and the Fed’s future path, near-term volatility is elevated. We are seeing increased demand for options on the S&P 500 and VIX call options expiring shortly after the meeting. This is a direct play on the potential for a market overreaction to whatever the central bank announces next week.
Historically, the start of a rate-cutting cycle can be volatile, and traders are debating if this is a minor “mid-cycle adjustment” like we saw in 2019 or the beginning of a larger easing cycle like in 2007. The pricing in Eurodollar futures suggests the market is leaning toward a more sustained cutting path into 2026. This outlook is shaping longer-term strategies in instruments like interest rate swaps.
