Chances of an October rate cut now 100%, says FedWatch

The odds of a Federal Reserve rate cut in October have hit 100%, according to the CME FedWatch tool, as mounting economic headwinds and political turmoil sharpen the focus on monetary policy.

The tool, which tracks market bets on Fed moves, has become a key guide for rate expectations.

A 25-basis-point cut is now 99% likely, according to that gauge, with a 1% chance of an oversized 50-basis-point cut and zero chance that the central bank will hold rates at the end of the month. 

Other analysts have also indicated chances of a Fed cut rose amid sluggish jobs numbers and the federal government's shutdown.

“The Federal Reserve emphasized the September move as an insurance cut,” Ryan Sweet, chief US economist at Oxford Economics, said prior to the government closure Wednesday.

“A shutdown would likely leave the central bank in a fog about the labor market, fueling support for an October cut rather than risk falling behind and having to cut more later.”

Shutdown threat clouds the outlook

Sweet estimated that “a partial government shutdown reduces GDP growth by 0.1ppt-0.2ppts per week. For context, a shutdown that lasts the entire quarter, which has never occurred, would reduce Q4 real GDP growth by 1.2ppts-2.4ppts.”

He flagged that delays in key data releases could force the Fed to rely on private sources, such as the ADP National Employment Report, to guide policy decisions.

The latest ADP report showed the US private sector lost 32,000 jobs in September, reinforcing signs of a cooling labor market. “This month's release further validates what we've been seeing in the labor market, that US employers have been cautious with hiring,” Dr. Nela Richardson, ADP’s chief economist, said. The Bureau of Labor Statistics may halt reporting during a shutdown, making private data even more critical.

Federal Reserve Vice Chair Philip Jefferson warned that the labor market “is softening, which suggests that, left unsupported, it could experience stress.” He projected US growth would slow to about 1.5% for the rest of the year and signaled that the unemployment rate could edge higher before improving next year.

A weaker labor market can lead to higher unemployment and less consumer spending. To support hiring and prevent a deeper slowdown, the Fed may lower rates to make borrowing cheaper and encourage investment.