BlackRock Research Report: Fed Expected to Begin Rate Cuts in September, with a Reasonable Case for a 50 Basis Point Cut

According to ChainCatcher, market sources report that for several weeks, investors have been pouring into swap contracts, options, and direct long positions in U.S. Treasuries, betting that slowing inflation will allow the Federal Reserve to lower borrowing costs in the coming months. This view received initial validation on Tuesday: after the July inflation data was released, short-term U.S. Treasury yields fell, and swap contract traders raised the probability of a rate cut in September to 90%.

Even more notably, the market is increasingly betting that the Fed will cut rates by more than 25 basis points in September. On that day, traders added about $2 million in premiums to positions related to the Secured Overnight Financing Rate (SOFR), which would profit from a larger-than-expected rate cut.

"Although today's (Tuesday's) inflation data was slightly stronger than in previous months, it is still well below the level many feared," said Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, in a research report. "Therefore, we expect the Fed to begin cutting rates in September, and there is even a reasonable case for a 50 basis point cut."

In addition, Goldman Sachs' trading and research teams previously stated that the market is underestimating the likelihood of a 50 basis point rate cut by the Fed in September.