Markets see growing likelihood of a 50-point cut as Trump's Fed appointee calls for an oversized reduction
The prospect of a half-point interest rate cut by the Federal Reserve gained momentum this week, as traders ramped up bets on an outsized move and a key central bank official openly backed a more aggressive approach.
Federal Reserve Governor Stephen Miran, a Trump appointee, said Thursday that he would favor a 50-basis-point reduction at the upcoming policy meeting, citing heightened downside risks from trade tensions and a restrictive policy stance.
“If monetary policy stays as restrictive as it is, and you have a shock like this hit the economy, it does materially increase the negative consequences of that shock,” Miran said in an interview with Fox Business.
He added that while the committee is likely to opt for a quarter-point cut, “I think that we are probably set up for three 25-basis-point cuts this year.”
Miran said yesterday that the latest impasse in trade talks and China’s move to restrict access to rare earth materials have heightened uncertainty for growth.
“There’s now more downside risks than there was a week ago, and I think it’s incumbent upon us as policymakers to recognize that should get reflected in policy,” Miran said.
“However, with the change to the balance of risks, I think it becomes even more urgent that we get to a more neutral place in policy quickly."
Miran, who joined the Fed board just last month, has advocated for an additional 1.25 percentage points in cuts on top of the quarter-point move the Federal Open Market Committee (FOMC) approved in September.
Treasury yields slide as markets brace for Fed decision
Recent activity in options linked to the Secured Overnight Financing Rate (SOFR) revealed a surge in wagers on a 50-basis-point cut by year-end.
Open interest in December SOFR options spiked, with traders positioning for a larger-than-expected move either at the October or December meetings.
The December SOFR options, which expire just after the Fed’s December 10 announcement, have become a favored vehicle for these bets.
This trend extends to the cash market, where US Treasury yields have dropped to multi-month lows. Two-year yields neared 3.5%, while 10-year yields hovered just above 4%, reflecting expectations of easier policy ahead.
Fed Chair Jerome Powell signaled that a quarter-point cut remained the base case, citing slowing hiring and persistent inflation above the 2% target.
However, Miran’s comments and the surge in hedging activity suggest that the odds of a larger move are rising, especially as unresolved trade tensions and a backlog of economic data add to uncertainty.
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