Fed Meeting Minutes: Option Pricing Implies One to Two Rate Cuts Within the Year

On May 29th. The minutes of the Fed meeting indicated that during this period, the benchmark policy path, based on option-implied prices (which represent the market's mainstream expectations), shifted slightly downward. This suggests that there may be 1 to 2 interest rate cuts by the end of the year (with each cut being 25 basis points). This is slightly more than the expectations at the March FOMC meeting. The option-implied probability distribution of year-end interest rates has shifted to the left, with significantly increased downside risks. As the market perceives an intensified downside risk to the policy rate, the implied expected policy path in the futures market shows a larger downward adjustment, indicating around 3 rate cuts before the end of the year. However, the median benchmark interest rate path from market expectation surveys has not changed much and still suggests 2 to 3 rate cuts this year. Nevertheless, the survey indicates that the divergence among respondents on the most likely policy path is increasing. (FX678)