JPMorgan, Citi see Fed dealing two supersized cuts this year

WALL Street banks are calling for aggressive interest rate cuts by the Federal Reserve based on the latest evidence that the labour market is cooling.

Economists at Bank of America (BOA), Barclays, Citigroup, Goldman Sachs Group and JPMorgan Chase revamped their forecasts for US monetary policy on Friday (Aug 2) after data showed the US unemployment rate rose again in July. All are calling for earlier, bigger or more interest rate cuts.

Citigroup economists said that they expect half-point rate cuts in September and November and a quarter-point cut in December, having previously predicted quarter-point cuts at all three meetings. The Fed will then reduce rates by a quarter point at each meeting until mid-2025, bringing the policy band to 3 to 3.25 per cent, Veronica Clark and Andrew Hollenhorst predicted.

JPMorgan economist Michael Feroli went a step further. While he also predicted half-point rate cuts in September and November, followed by quarter-point reductions at every subsequent meeting, Feroli said that there’s “a strong case to act” before the next meeting on Sep 18. Fed chair Jerome Powell may not “want to add more noise to what has already been an event-filled summer”, however, he added.

Friday’s jobs report showed US hiring slowed markedly while the unemployment rate rose to 4.3 per cent, the highest in nearly three years. The rise in the jobless rate caused its three-month moving average to exceed the 12-month low by half a percentage point. According to the Sahm rule – devised by former Fed economist Claudia Sahm – that means a recession is underway.

That fuelled a further rally in the Treasury market, with the policy-sensitive two-year yield tumbling as much as 31 basis points to 3.84 per cent, the lowest since May 2023, before paring the drop.

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Fed policymakers met early last week and signalled that they are on course to start lowering borrowing costs as soon as September from the two-decade high reached a year ago. In a news conference after the meeting, however, Powell said that a half-point cut was “not something we are thinking about right now”. He also reiterated that the Fed “is prepared to respond” to unexpected labour-market weakness.

“With the benefit of hindsight, it’s easy to say the Fed should have cut this week,” JPMorgan’s Feroli said. “Even if the softening in labour market conditions moderates from here going forward, it would seem the Fed is at least 100 basis points offsides, probably more.”

Interest rate swaps show that traders see a more-than-70 per cent chance of a half-point move in September, and are pricing in a total of about 119 basis points of reductions by year-end. In Fed funds futures, a wave of buying swept the market on Friday, consistent with bank calls for aggressive easing.

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The price action harkens back to the divide that existed at the start of the year, when forecasts for as many as six quarter-point cuts this year mirrored market-implied expectations. Fed policymakers at that point were anticipating easing by 75 basis points, based on their median forecast, which in June changed to 25 basis points.

On Friday afternoon, Chicago Fed president Austan Goolsbee said the central bank will not overreact to any one piece of economic data, echoing comments by Powell on Wednesday.

Economists at Barclays, Goldman Sachs and TD Securities added a third quarter-point rate cut, in November, to their previous 2024 forecast for September and December moves after the jobs report. While the July data may overstate weakness in the labour market, if the August report is also soft, a half-point rate cut in September “would become likely”, Goldman economists led by Jan Hatzius said.

Bank of America economists led by Michael Gapen, who’d been a holdout for rate cuts beginning in December, said they now look for the first move in September.