The Fed surprised many investors with a jumbo rate cut this week. It won’t get much easier to predict the next move

Federal Reserve Chair Jerome Powell is known for providing clear signals about the central bank’s next interest rate move in order to avoid roiling markets. But Wall Street was mostly clueless this week when it came to predicting how big a rate cut the Fed would deliver on Wednesday.

Federal Reserve Chair Jerome Powell is known for providing clear signals about the central bank’s next interest rate move in order to avoid roiling markets. But Wall Street was mostly clueless this week when it came to predicting how big a rate cut the Fed would deliver on Wednesday. What made this time different? The jumbo half-point cut the Fed ultimately rolled out was not at all what traders expected a week ago. Rather, they were overwhelmingly expecting the Fed to cut by a more traditional quarter point, according to fed funds futures, which capture market expectations for what the central bank will do at upcoming meetings. By Friday, just four days before the Fed’s two-day policy meeting kicked off, the odds of a half-point versus a quarter-point cut were split evenly at 50-50. But by Monday, the odds had shifted toward a half-point cut, albeit more narrowly than what’s typically seen so close to the start of a meeting, underscoring the lingering uncertainty over what the Fed would do. Traders’ lack of conviction regarding the Fed’s next move likely reflected officials’ own internal uncertainty heading into the meeting. But it doesn’t necessarily mean that upcoming rate decisions will be as hard for markets to predict.