Bets on October rate-cut overblown as Fed a ’reluctant dove,’ Macquarie warns

Investing.com -- Markets are betting heavily on an October rate cut, but Macquarie warns those odds are far too high as the Federal Reserve is proving to be a “reluctant dove.”

“With stocks rallying, gold spiking, and corporate credit spreads remaining tight, the OIS-implied probability of a Fed cut on October 29 – now at 96% – seems to be too high. The right ballpark should be a 50-75% probability,” Macquarie economists said in a recent note.

Lingering inflationary pressures and resilient economic data are mudding the path to an October rate cut, the economists added, warning that traders may be mispricing the likelihood of more rapid easing.

The Fed’s September meeting minutes revealed discomfort among several officials with the latest rate cut. “A few participants stated there was merit in keeping the federal funds rate unchanged at the September meeting or that they could have supported such a decision,” Macquarie highlights, noting concern that inflation progress has stalled this year.

Recent market data have reinforced the Fed’s caution. Non-official inflation indicators have remained sticky or moved higher. The New York Fed’s survey reported a rise in expected inflation, while business prices in services stayed elevated and high-frequency measures like Cleveland Fed’s CPI NowCast are holding near 3%. Even with the labor market resilient and Q3 GDP tracking around 3%, the inflation backdrop leaves little room for back-to-back easing.

The Fed’s September meeting minutes also alluded to inflation concerns among members.

"A majority of participants emphasized upside risks to their outlooks for inflation, pointing to inflation readings moving further from 2 percent, continued uncertainty about the effects of tariffs, the possibility that elevated inflation proves to be more persistent than currently expected even after the inflation effects of this year’s tariff increases fade," the minutes showed.  

Macquarie warns that even if the Fed does deliver a cut on October 29, it will likely come with warnings about future moves.

Absent a sharp pullback in stocks and gold, the rate cut probability priced in by markets is well out over its skis.