Barclays thinks the Federal Reserve will start cutting interest rates this month, with three cuts expected by 2025. This outlook comes from a slowing US job market, causing more people to anticipate lower rates. They expect the first cut to be 25 basis points, though some traders hope for a half-point cut. They project three cuts this year, one at each of the remaining Federal Reserve meetings. Barclays does not expect 50-basis-point cuts unless inflation drops to very low levels. Price pressures may come back as tariffs affect consumer costs, making it hard for the Fed to manage slower job growth alongside inflation concerns.

Upcoming FOMC Meeting

The Federal Open Market Committee (FOMC) will meet on September 16 and 17. With the meeting just a few days away, derivatives markets show a strong expectation of a rate cut. Fed funds futures suggest there’s about an 85% chance of a 25-basis-point decrease, which most traders expect. However, a small part of the market is ready for a bigger 50-basis-point cut. This expectation for cuts arises from a noticeable slowdown in the job market. The August jobs report revealed a disappointing growth of just 150,000 non-farm jobs, and the unemployment rate rose to 4.1%. In light of this, traders might want to look at strategies that benefit from falling interest rates, like taking long positions in Treasury futures. The main risk to this optimistic outlook is persistent inflation, with the last Consumer Price Index reading at 3.4% year-over-year. This situation makes it tricky, as tariffs could lead to higher prices again, causing the Fed to hesitate in making more cuts. Some traders are using options on commodity ETFs or interest rate floors to protect against a “hawkish cut,” where the Fed lowers rates but hints at a pause in future cuts.

Market Reactions and Future Outlook

With uncertainty about the size of the rate cut and the Fed’s direction, short-term volatility is high. We are seeing more interest in options on the S&P 500 and VIX call options that expire soon after the meeting. This reaction is linked to the potential for a market overreaction to whatever the central bank announces. Historically, the start of a rate-cutting cycle can be choppy. Traders are debating whether this situation is like the minor “mid-cycle adjustment” of 2019 or the start of a larger easing cycle like in 2007. Pricing in Eurodollar futures indicates the market is leaning toward a more extended rate-cutting path that could last into 2026. This view is influencing long-term strategies around instruments like interest rate swaps. Create your live VT Markets account and start trading now.

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