06 Mar 2024 1 min read

Chart of the month: The roulette of rate cuts

By Christopher Jeffery

What is the options market saying about the probability of the Fed not cutting rates this year?


If we think an event is likely to happen with a 25% probability, it is neither in the realm of a tail risk, nor a central scenario. It's not probable, it's not improbable, but it's definitely plausible.

Toss a coin and you've got a 25% probability of it coming up heads twice in a row. At various points in the year, bookmaker odds have implied a 25% probability of someone other than Donald Trump or Joe Biden winning the US presidential election.

Our chart of the month shows that traders now think it is plausible that the Federal Reserve (Fed) leaves rates completely unchanged all year. Using the options on money market futures, we can calculate the implied probability of there being no Fed rate cuts at the end of the year.

In January and early February, traders priced this is a 10-15% probability. That's less than the chance of rolling a 6 on a single roll of the dice. The ‘rate cuts are coming’ narrative has supported risk sentiment across the board. Risk sentiment hasn't ebbed, but the perceptions of the Fed have evolved.

The ‘no cuts’ scenario has been priced in the 25-30% range since mid-February. So it’s neither a tail risk, nor a central scenario, but suddenly it's seen as plausible.

Christopher Jeffery

Head of Macro, Asset Allocation

Chris is Head of Macro within LGIM’s Asset Allocation team. He oversees LGIM’s Economic Research, Rates and Inflation, and the Multi-Asset Strategists and idea generators. He joined LGIM in 2014 from BNP Paribas Investment Partners where he worked as a senior economist and strategist within the Multi-Asset Solutions group. Prior to that, he worked as an economist within monetary analysis at the Bank of England with a focus on the UK domestic economy. Chris graduated from University College, Oxford in 2001 with a first class degree in philosophy, politics and economics. He also holds an Msc in economics (research) from the London School of Economics and is a CFA charterholder.

Christopher Jeffery