US rate futures lift chances of further easing in October after Fed cuts rates

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - Futures on the federal funds rate, which measure the cost of unsecured overnight loans between banks, further raised the odds on Wednesday that the Federal Reserve will deliver another interest rate cut at the October meeting, with an 86% probability.

That was 71.6% before the Fed's decision on Wednesday to cut interest rates by 25 basis points to the 4.00%-4.25% range. In a statement, policymakers indicated it will steadily lower borrowing costs for the rest of this year, as policymakers responded to concerns about weakness in the job market

The remaining odds of about 13-14% are betting the Fed will pause.

U.S. rate futures also factored in about 70 basis points in rate cuts in 2025 after the Fed statement. The Fed's rate forecast or the so-called "dot plot" showed projections of two more rate declines this year.

The dots from the meeting in June showed the median expectation from policymakers was for 50 bps of cuts this year and single 25-bp declines in 2026 and 2027.

In a press briefing after the Fed statement, Fed Chair Jerome Powell indicated that Wednesday's move to lower interest rates was a risk management cut, adding that he doesn't feel the need to move quickly on rates.

"Powell is going to need to justify why the dots show more cuts in 2026 with lower unemployment and higher inflation than projected in June," said Christopher Hodge, chief U.S. economist at Natixis in New York.

"The dots are an awkward amalgam of predictions that are not easily explained, but still, the dovish dot plot seems in conflict with the projected inflationary/labor dynamics. I do think the Fed will ultimately keep moving towards neutral, but that will help to keep inflation elevated throughout 2026."

Compared to the stagflationary risks contained in the last set of projections, with the Fed slowing its rate cuts to head off inflation, the new projections show increasing belief among Fed officials they can head off any rise in unemployment with a faster pace of rate reductions, while inflation eases slowly next year.

Only new Governor Stephen Miran, who joined the Fed on Tuesday and is on leave as the head of the White House's Council of Economic Advisers, dissented in favor of a half-percentage-point cut.

Miran dissented over the latest cut and appears to have penciled in the steepest rate cuts in projections issued after he joined the Board of Governors on Tuesday. In the newest "dot plot," one rate projection of 2.875% for the end of 2025 stands out as being 75 basis points below the next lowest one. Trump has demanded steep rate cuts.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saeed Azhar; Editing by Nick Zieminski)