Fed Rate Cut: ‘There Are Good Reasons’ to Ease Rates Ahead of Next Meeting

Policymakers don’t meet again until September 17-18, giving investors a month and a half to worry about the economy and markets after the central bank held rates steady at its last meeting on Wednesday.

Fed Chair Jerome Powell is likely to provide further hints of rate cuts at the Jackson Hole conference later this month. The Fed has made rate adjustments between meetings in the past, though that has typically occurred during crises such as the COVID-19 pandemic in 2020 and the 2008 financial crisis.

“In hindsight, it’s easy to say the Fed should have cut rates this week,” Michael Feroli, chief U.S. economist at JPMorgan, wrote in a note Friday. “It’s also easy to say it will cut rates soon. When and by how much are harder questions.”

Even if the labor market weakness stabilizes later, the Fed would still appear to be “offside” by 100 basis points or more, he added.

As a result, Feroli expects the Fed to cut rates by 50 basis points at its September meeting, then again at its November meeting, and then by 25 basis points at each subsequent meeting.

But he could also envision a scenario in which Powell and company do something even more aggressive.

“From a risk management perspective, we believe there is a strong case for action before September 18,” Feroli wrote. “But Powell may not want to add more noise to an already eventful summer.”

Indeed, the twists and turns of the US election season have shaken up the markets. After experiencing strong growth following the first presidential debate and the attempted assassination of Donald Trump, the “Trump trade” quickly lost momentum after Vice President Kamala Harris took over from Joe Biden at the head of the Democratic ticket.

And an emergency rate cut between Fed meetings could even stoke panic rather than calm fears, because it could signal a sharp deterioration in sentiment among central bankers, who have long said they are in no hurry to ease monetary policy.

JPMorgan, for its part, now believes the Fed will eventually cut the benchmark rate to around 3%, meaning rate cuts would extend through the third quarter of 2025 and shave more than 200 basis points off the current rate of 5.25% to 5.5%.

Others on Wall Street urged investors not to overreact to the sudden weakening in employment. Claudia Sahm, a former Fed economist who developed the “Sahm Rule” recession indicator, said: Fortune On Friday, she said she was not currently concerned that the United States was in a recession.

Although her namesake reign was sparked by the latest data, which saw the unemployment rate climb to 4.3%, she noted that household incomes continue to grow while consumer spending and business investment remain resilient.

However, recent trends in the labor market appear weak at best, said Sahm, who is now chief economist at investment firm New Century Advisors.

“This has proven to be very accurate over time, so it should not be dismissed,” she added, noting that “recessions can develop slowly and then come on quickly.”

In the same way, Preston Caldwell, Morningstar’s chief U.S. economist, said in a note Friday that markets overreacted to the jobs report, but cautioned that it was still bearish news. And had the data been available at the Fed’s last meeting, officials would have cut rates, he added.

“Once the unemployment rate starts to rise, it is very likely to continue to rise,” Caldwell wrote. “Rising unemployment is part of a vicious process of economic contraction. Unemployment leads to less spending, which leads to businesses cutting staff and increasing unemployment further.”

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