The Fed surprised many investors with a jumbo rate cut this week. It won’t get much easier to predict the next move

Federal Reserve Chair Jerome Powell is known for providing clear signals about the central bank’s next interest rate move in order to avoid roiling markets. But Wall Street was mostly clueless this week when it came to predicting how big a rate cut the Fed would deliver on Wednesday.

What made this time different?

The jumbo half-point cut the Fed ultimately rolled out was not at all what traders expected a week ago. Rather, they were overwhelmingly expecting the Fed to cut by a more traditional quarter point, according to fed funds futures, which capture market expectations for what the central bank will do at upcoming meetings.

By Friday, just four days before the Fed’s two-day policy meeting kicked off, the odds of a half-point versus a quarter-point cut were split evenly at 50-50.

But by Monday, the odds had shifted toward a half-point cut, albeit more narrowly than what’s typically seen so close to the start of a meeting, underscoring the lingering uncertainty over what the Fed would do.

Traders’ lack of conviction regarding the Fed’s next move likely reflected officials’ own internal uncertainty heading into the meeting. But it doesn’t necessarily mean that upcoming rate decisions will be as hard for markets to predict.

Powell: Fed officials ‘left the size of the rate cut open’ ahead of September meeting

In a closely watched speech at the Fed’s annual economic symposium in Jackson Hole, Wyoming, last month, Powell declared “the time has come” to cut interest rates. What he didn’t mention was the size or pace of those cuts.

On Wednesday, Powell acknowledged that omission, telling reporters that central bank officials also “left it open going into blackout.” (Fed officials are prohibited from publicly sharing their views on monetary policy before and after each meeting, a period known as a blackout.)

In the days leading up to this month’s Fed meeting, two crucial economic reports were released: The Consumer Price Index, an inflation gauge that measures the prices consumers pay for goods and services; and the Producer Price Index, which captures prices businesses pay at the wholesale level.

The CPI report showed annual inflation cooled to 2.5% in August, the lowest annual increase since February 2021. The PPI report showed wholesale prices markedly slowed in August to a rate of 1.7% from an annual increase of 2.1% the month before.

That data was apparently enough to spur some Fed officials to reconsider their position. On Friday, Fed Governor Christopher Waller said the inflation numbers pushed him toward wanting to cut rates by a half point, but that prior to their release he thought cutting by a quarter point “would have been a good idea,” he shared in an interview with CNBC.

Federal Reserve Chairman Jerome Powell speaks during a news conference following the September meeting of the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Board Building on September 18, 2024 in Washington, DC. The Federal Reserve announced today that they will cut the central bank’s benchmark interest rate by 50 basis points to a new range of 4.75%-5%.