You gotta love it. Following last week’s US CPI report, all-knowing, efficient markets were convinced a 50bps September rate cut from the Fed was off the table. I was likewise convinced, despite my conviction in the merits of a half-point first move. Betting odds had 50bps priced at just ¢8.

Fast forward to Monday, and traders added to the rate-cut wagers built on the heels of Nick Timiraos’s September 12 trial balloon which, you’ll recall, revived the debate. As of this writing, Wednesday’s FOMC meeting was effectively priced as a coin toss. The same betting odds which had 50bps priced at ¢8 just a few days ago were bid at ¢54.

I fielded an email over the weekend from a self-described “rates trader” (read: some guy sitting in his suburban home office) who wasn’t amused with my repeated references to betting markets in the context of FOMC meetings. Those of you inclined to turn up your nose at betting markets need a reality check: There’s no difference between traders and bettors. It’s gambling. Whether you use STIRS or Polymarket, whether you’re wagering on Fed meetings or football games, it’s just gambling. Full-stop.

Anyway, the figure below shows you the evolution of September FOMC pricing. The green arrow denotes the sharp rethink since last week’s CPI report ostensibly “settled” the debate in the favor of 25bps.

“Despite a mixed batch of US data last week, investors seem to be favoring a ‘front-loaded’ scenario for the Fed’s easing cycle,” ING’s Chris Turner remarked. “This is premised on the view that if the Fed has decided that the time has come for rate cuts, then why not get rates back to some kind of neutral level as quickly as possible without sparking a panic?”

That’s part of the thinking. But my view is that the Fed’s primary goal is to get ahead of the jobs curve in light of the payrolls trend and a UNR that’s nearly a full percentage point off the (record) lows. Particularly in light of Jerome Powell’s avowed determination to forestall any additional labor market softening. Recall how Timiraos characterized Powell’s Jackson Hole address in his (Nick’s) market-moving piece last week: The speech, he wrote, “surprised some of [Powell’s] colleagues with its unambiguous call to turn attention to incipient risks in the jobs market.”

On Sunday evening, shortly after WSJ chief economic commentator Greg Ip published a piece loudly calling for 50 (“Interest rates are too high,” he declared. “With rates so far from ‘neutral’ and the labor market cooling, it’s better to start big.”), Nick retweeted a table showing Wall Street’s efforts to translate CPI and PPI into PCE. “They have core at 0.15% [for] August [which] would lead the 12-month rate to tick up to 2.7% [but] the 6-month annualized rate would fall to 2.4% and [the] 12-month headline is seen dropping to 2.3%.”

I’m not suggesting Timiraos was telegraphing anything there (Ip was, though), and indeed he tweets things like that all the time. But he appeared to be driving home the point from his quick take assessment of last week’s PPI release. “Economists who map the CPI and PPI into the PCE think core inflation using the Fed’s preferred gauge will be around 0.13% to 0.17% in August, extending a streak of mild, target-consistent monthly readings,” he wrote, on September 12. “This is notably cooler than the August core CPI.” They key phrase there is “mild, target-consistent monthly readings.”

You can draw your own conclusions, but traders and bettors (bettors and traders) aren’t to be blamed for upping the odds of 50. Where I think most observers have this wrong is in assessing that one 50bps cut out of the gate telegraphs an intention to mirror the aggressiveness and rapidity of the hiking cycle on the way back down.

There was an urgency to get policy into restrictive territory in 2022. That was an urgency born of panic. Inflation was already raging. The Fed was behind the curve, and woefully so. By contrast, the point of going with 50bps for the first cut is to prevent being behind the curve as the labor market decelerates. If anything, a 50bps first cut reduces the chances of a follow-up 50. At least in my opinion.

JonesTrading’s Mike O’Rourke understands that. Or seems to anyway. “If the FOMC is truly ‘data dependent’ and lacks a crystal ball to provide a precise economic outlook, here is what the central bank ‘should’ do. Based on the rise in the unemployment rate and the triggering of the Sahm Rule recession indicator, it would be entirely appropriate for the central bank to lower rate[s] by 50bps,” he wrote, as the new week dawned. “[But] due to the mixed nature of the economic data, there should be no change to the dot plot beyond incorporating this 50bps cut,” he went on. “In short, the Fed should not be promising additional 2024 rate cuts for the November or December meetings since the current data does not support such a move.”

Remember: The Fed’s going to see the advance read on Q3 GDP before the November meeting. That release is due from the BEA on October 30. Spoiler alert: It’s not going to betray a recession. Nothing like a recession, in fact. “Outside of the deceleration of job growth, most of the economic data has remained constructive, if not good,” O’Rourke added, noting that the dot plot anyway doesn’t tie the Fed’s hands. They could cut 50bps this week, tip no additional 2024 cuts and then simply cut rates again if and when conditions warrant.

Of course, the Fed isn’t especially likely to cut 50 this week and telegraph no additional 2024 cuts. That’s the second-least likely rates-dots outcome, in my view, behind only the wholly implausible “cut 25 and tip 25 more” hawkish cut scenario.

Still — and assuming 50bps this week — I have to think a “no change” outcome at the November meeting is mispriced by the same betting markets which I strongly suggested (on August 20) were underpricing 50bps for September. As of Monday, that market had November “no change” priced at ¢7. I don’t know what the “actual” odds of the Committee staying on hold in November are, but if Powell cuts 50bps this week, I do know those odds are much higher than that pricing currently suggests, barring, of course, a disastrous September jobs report on October 4.