With only two days to go, whether Fed policymakers will cut interest rates by a quarter-point or a half point is considered a tossup in US interest-rate markets. Except for the Fed’s emergency rate cut in March 2020 at the onset of the pandemic, that’s the greatest amount of doubt in interest-rate swap markets for any scheduled US central bank decision since 2007, according to data compiled by Bloomberg.

The analysis is based on the difference between the swap rate that predicts Fed decisions two days before they were made, and the rate that ultimately was decided upon. Fed policymakers have all but guaranteed a rate cut this week — the first since 2020. Before entering a self-imposed quiet period on Sept. 7, however, they offered disparate assessments of whether the risk of additional labor-market weakening warranted a move larger than 25 basis points, which could reignite inflation.

“It is a close call,” wrote Philip Marey, a senior US strategist at Rabobank, who expects the Fed to deliver a standard quarter-point decrease. Lack of guidance from Fed Chair Jerome Powell could indicate that the committee “has not reached a consensus yet.” Meanwhile, August retail sales data to be released Tuesday “could still alter the calculus.”

Until last week, when several media reports quoted former Fed officials making the case for a bigger move, traders had all but ruled out a rate cut larger than 25 basis points. 

Bill Dudley, a former president of the New York Fed and a Bloomberg Opinion columnist, chimed in Monday in favor of a half-point rate cut.

Swaps tied to this week’s Fed’s decision priced in a reduction of 37 basis points from the current effective fed funds rate of about 5.3%. That splits the difference between a quarter-point and a half-point cut. A total of 117 basis points of easing was priced in for the year, embedding an expectation that the Fed will do a half-point rate cut, if not this week then at one of this year’s two remaining meetings in November and December. 

The yield on two-year Treasuries shed about 3 basis points to 3.56% on Monday, extending a rally from over 5% in late April. Ten-year yields declined less, to 3.63%, widening the gap between two to about 7 basis points. The short-term yield was more than a percentage point higher following the Fed’s 11 rate increases in 2022 and 2023, and it was higher for a record amount of time. 

Yield-curve steepening has become a popular trade on Wall Street, with strategists at Bank of America, BMO Capital Markets, JPMorgan Chase & Co. and Morgan Stanley advocating various forms of it ahead of this week’s Fed meeting. 

Meanwhile, the Bloomberg dollar index fell 0.4% Monday, extending its erosion against most major currencies over the past month as the Fed’s easing cycle draws near. The yen was among the biggest gainers, advancing past the closely watched 140 per dollar level on Monday. 

“We see a new and imminent Fed easing cycle as a major headwind for the dollar,” said Rodrigo Catril, strategist at National Australia Bank Ltd. “The dollar will embark on a cyclical decline as the Fed eases and takes the fund rate toward neutral, if not below, next year.”

Less than two months before the presidential election, the Fed pivot comes against the backdrop of an increasingly fraught political situation in the US. Three Democratic senators urged the Fed to aggressively cut the central bank’s benchmark interest rate, including by 75 basis points this week, to protect the US economy from potential harm. 

Meanwhile, the FBI is investigating an apparent assassination attempt against former President Donald Trump, just two months the Republican presidential candidate was shot at a rally in Pennsylvania. 

With Fed members in a blackout period before the Sept. 17-18 policy meeting, traders have few data points to rely on beyond the August retail sales report.

(Updates to show markets are undecided on Fed’s move in 1st paragraph)