Janice R. Andrews
Surprisingly, Wall Street banks are now projecting the Federal Reserve to lower interest rates aggressively in response to new data showing the labor market is cooling. Following new data showing an increase in the US unemployment rate for July, economists at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co. changed their projections for US monetary policy. These banking behemoths are now pushing for rate cuts that are earlier, bigger, or more frequent than initially thought.
For example, Citigroup economists now see rate reductions of half a percentage point in September and November, and a quarter of a percentage point in December. They used to expect quarter-point reduction at all three meetings, but this is a big change. As to the reports of Andrew Hollenhorst and Veronica Clark, the Federal Reserve would lower interest rates by a quarter point at every meeting until mid-2025, ultimately reducing the policy band to 3.25% to 3%.
Michael Feroli, an economist at JPMorgan, has gone one step beyond. In addition, he projects rate cuts of half a percentage point in September and November, with quarter points taken off at each succeeding meeting. Before the September 18 meeting, Feroli says there’s a “strong case to act.” He does concede, though, that Fed Chair Jerome Powell might not want to exacerbate the already turbulent summer.
The jobs data released on Friday, which showed a sharp decline in US hiring and an increase in the unemployment rate to 4.3%—the highest level in over three years—acted as the impetus for these updated projections. The three-month moving average of the unemployment rate rose by half a percentage point as a result of this increase, surpassing the 12-month low. This suggests that a recession is starting, according to the Sahm rule, which was developed by former Fed economist Claudia Sahm.
The policy-sensitive two-year Treasury yield fell as high as 31 basis points to 3.84%, the lowest since May 2023, as the market responded quickly to the jobs report. Even if the decline was somewhat recovered, it was evident that investors are expecting big Fed action.
Fed policymakers said earlier this week that they want to begin reducing borrowing prices as early as September. At a press conference after the meeting, Powell said that the Fed “is prepared to respond” to sudden deterioration in the labor market but said that a half-point decrease was “not something we’re thinking about right now.”
Feroli of JPMorgan stated, “With the benefit of hindsight, it’s easy to say the Fed should have cut this week.” It appears the Fed is at least 100 basis points, if not more, off target, even if the weakening of labor market conditions continues from here.
Interest-rate swaps show that traders are pricing in a total of around 115 basis points of reductions by year-end and estimate a more-than-70% possibility of a half-point move in September. A flurry of purchases in the fed funds futures market on Friday matched the banks’ demands for rapid easing.
This situation is reminiscent of the division that existed at the start of the year when projections for up to six quarter-point cuts were in line with what the market anticipated. At first, Fed officials projected a 75 basis point relaxation, a median estimate that by June had dropped to 25 basis points.
Chicago Fed President Austan Goolsbee repeated Powell’s remarks on Bloomberg Television, stressing that the central bank will not overreact to any one piece of economic data.
In response to the most recent jobs report, Jan Hatzius and the Goldman Sachs analysts have added a third quarter-point rate drop for November to their 2024 projection. Even while the labor market may not be as poor as July’s statistics suggested, a similarly dismal August report may increase the likelihood of a half-point rate drop in September.
Oscar Munoz, the top US macro analyst at TD Securities, and his colleagues now project another quarter-point rate decrease in November, consistent with their earlier projections for policy easing in September and December. Through November 2025, they predict that the central bank will loosen by 25 basis points at each meeting.
Former opponents of rate decreases starting in December, Bank of America analysts led by Michael Gapen now forecast that the first drop will take place in September.
The updated estimates from Wall Street highlight the increased uncertainty and the critical role that labor market data plays in guiding monetary policy as the Fed navigates these tumultuous economic waters. Future economic reports will be eagerly watched by lawmakers and investors alike; the August employment report is the next important signal.
