Why the Federal Reserve has gambled on a big interest-rate cut

When the Fed raised rates between early 2022 and mid-2023, it telegraphed the size of each rise in advance. On this occasion, there was genuine uncertainty about how big the reduction would be. A week earlier, market pricing implied roughly 65% odds that the Fed would reduce rates by a quarter-point and 35% odds of a half-point. By the day before the decision, pricing had flipped, indicating a 65% probability of a half-point cut. The fact that some investors, albeit a minority, were still positioned for a smaller move helps to explain why stock prices rallied shortly after the Fed opted for a bigger cut.