The Fed is expected to cut interest rates again, and traders are betting on this.

The US Federal Reserve is expected to cut interest rates again in November. This has led traders to increase their bets, boosting hopes that the US economy will avoid a recession. Investors think there is a 53 per cent chance that the Fed will repeat its half-a-percentage-point cut to borrowing costs days after the US presidential election in November. The central bank cut rates by a similar amount last week to launch its monetary ease programme.

The S&P 500 index of New York stocks hit a new record high in this month amid optimism the Fed’s aggressive actions signaled the arrival of “soft landings” for the economic system, and not the start of a recession.

Rate cuts greater than a quarter point are often associated with emergencies such as pandemics or economic downturns, which force rate-setters to attempt to stimulate the economy. According to UBS, every Fed rate cut of half a percent since 1987 has been followed with a recession.

Investors believe the Fed will reverse this trend with rate reductions supporting a strong economic environment and a labour-market that has slowed but not crashed. Henry Allen, macro-strategist at Deutsche Bank said, “If you get the combination of rate cuts and a downturn without a recession, that is a very successful historical combination.” There are very few data points which suggest that a recession could be on the cards at this time.

The Fed’s rate cut is compared to the quarter-point cuts made by the Bank of England earlier this summer and the European Central Bank. The ECB eased policy again this month. Meanwhile, the Bank chose to keep rates steady last week.

Bank of America analysts said that they expect the Fed to make another half-point reduction at its next meeting, on November 7, just two days after the Presidential election. This would bring the Fed Funds rate down to between 4.25 and 4.5 percent. They warned, however, that such aggressive measures could keep inflation high.

Claudio Irigoyen is a global economist for Bank of America. He said that with US growth slightly above potential, strong consumer confidence, record stock market highs, and inflation above target it was hard to justify a new easing cycle, as if there were a recession imminent. A more aggressive easing could make it harder to reach the 2% inflation target, given the uncertainty that lies ahead, such as the aftermath of the US elections.

The Fed’s current easing cycle, according to economists, is similar to that of 1995. At that time, Alan Greenspan was the chairman of the central bank. He cut rates in response to signs that the labour market had slowed. This led him, at that time, back to a monetary policy that was “neutral”, where rates did not restrict growth or promote high inflation.

Dario Perkins is managing director of TS Lombard. He said: “After raising interest rates to a deliberately restricting setting, central banks want to deliver a softer landing by trimming monetary policies back to neutral. 1995 is a textbook example on how to do this and is Jerome Powell’s template today.”

Powell’s remarks last week that the neutral rate for the United States is “probably significantly higher than before the pandemic” suggest rates won’t fall to historic lows near 0%, as they did after the financial crises.

Jennifer McKeown is the chief global economist of Capital Economics. She said that interest rates will eventually settle at 2,5% in the eurozone and 3% in the UK. In America, the range would be between 3% and 3.25 percent.