Federal Reserve’s Interest Rate Outlook
The Federal Reserve (Fed) is expected to implement a modest interest rate cut of just 25 basis points during its monetary policy committee meeting scheduled for September 17 and 18, according to a majority of economists surveyed by Bloomberg. This forecast stands in contrast to calls from some Wall Street analysts for a more significant reduction in rates next month.
Nearly 80% of the experts consulted by Bloomberg’s reporters anticipate that U.S. central bankers will lower rates to a range of 5% to 5.25%. Meanwhile, the remaining one-fifth of respondents foresee a more substantial decrease. Only 10% of survey participants expect an emergency rate reduction prior to the official meeting in mid-September.
Current Economic Conditions
The Fed’s monetary strategists have dismissed the need for aggressive actions following a disappointing jobs report for July, which revealed a significant slowdown in job creation and an unemployment rate that climbed to 4.3%, marking the highest level seen in nearly three years. At the same time, officials at the central bank, led by Chairman Jerome Powell, emphasize their commitment to achieving full employment while continuing their fight against inflation.
Several major Wall Street banks, including JPMorgan Chase and Citigroup, have adjusted their forecasts in light of the weak labor market data released last week, with some now suggesting a 50 basis point rate cut in mid-September. Additionally, traders in interest rate futures have priced in a total reduction of 100 basis points by the end of the year, beginning with a cut of 50 basis points next month.
Consensus Among Economists
Despite these varied predictions, the consensus among economists is that the Federal Reserve will likely proceed with smaller steps of 0.25% during its meetings in September, November, and December, as well as in the first quarter of 2025. The survey of economists was conducted from August 6 to 8, amid widespread global market sell-offs.
Ryan Sweet, Chief U.S. Economist at Oxford Economics, commented that the calls for a large interest rate cut are “excessive and overly anxious.” He added, “Historically, the Fed’s monetary policy committee has enacted intermediate rate cuts and larger reductions of more than 25 basis points only in the face of clear negative economic shocks or when data has been significantly worse than prior forecasts.”
Future Employment Trends
Just two days before the release of the latest disappointing labor market data, U.S. central bankers maintained the current interest rates, indicating that a reduction might be appropriate during their September gathering. They view the slowdown in job creation as a sign of economic deceleration, but not necessarily a recession. According to Austin Goolsbee, the director of the Federal Reserve Bank of Chicago, growth continues at a “relatively stable level.”
Mary Daly, a colleague at the San Francisco Fed, remarked that while the labor market in the United States is slowing, it remains “reasonably resilient.” In the survey, 60% of participants described the labor market as stable, albeit softening, while 24% believed it has weakened significantly but will likely stabilize. Only 16% forecast severe job losses on the horizon.
Additionally, 46% of economists believe that an intermediate rate adjustment may be necessary before the official meeting in September.
Market Expectations and Economic Outlook
In light of the upcoming meetings, there may be a significant disruption required, such as a disturbance in the credit markets or issues related to liquidity. Despite the recent market downturn and the slowing economy, 69% of survey respondents believe that the United States can experience an economic slowdown without entering a recession. An additional 10% foresee a similar “soft landing” should the nation’s central bankers act swiftly and decisively. Only 22% anticipate a recession.
Historical Context of Federal Reserve Actions
During Jerome Powell’s tenure as chair of the Federal Reserve, the monetary policy committee has only made drastic moves under extraordinary circumstances. For instance, in the first two weeks of March 2020, monetary strategists reduced the baseline interest rate by 1.5%, quickly bringing it close to zero as the COVID-19 pandemic began to impact the national economy severely. Conversely, in 2022, central bankers implemented rate hikes of 50 to 75 basis points in response to rising inflationary pressures.
