After Federal Reserve Chair Jerome Powell has all but promised interest rate cuts at the upcoming Federal Open Market Committee meeting held on Sept. 17 and Sept. 18, the remaining question is how much. Markets are widely anticipating a 25-basis-point cut. But, after a weaker-than-expected August jobs report, economists are now weighing whether the central bank should double down and cut rates by 50 basis points.
Inflation in August came to 2.5 percent, a significant decline from the 9.1 percent peak in 2022 and a trend in the right direction towards the Fed’s 2 percent target. But core inflation, excluding the volatile food and energy prices, stuck at 3.2 percent in August, the same as July. “Since core inflation fell so dramatically in the [second] half of last year, it will be harder to see year-over-year improvement in core inflation for the next few months because of base effects,” Diane Swonk, KMPG’s chief economist, told Observer. Swonk said even though she believes the Fed should cut rates by 50 basis points, it will likely go with 25.
After two years of hiking rates to a 40-year high to combat inflation, there is evidence that the Federal Reserve has to shift its focus from inflation to new data revealing a potentially fraying labor market. In August, the U.S. economy added 142,000 jobs, below the estimated 161,000, revealing that economic growth is slowing, sparking recession fears. A Bureau of Labor Statistics report from last week revealed that employers have been hiring at the slowest pace since 2014. The unemployment rate is currently at 4.2 percent, which is not hugely worrisome but higher than the 3.8 percent a year ago. July’s jobs report was also weaker than expected.
Last month, Powell said at the Jackson Hole Economic Symposium that “the balance of the risks to our two mandates has changed,” referring to the Fed’s dual mission to keep both price growth and unemployment in check.
The CME Group FedWatch, which uses 30-day forward federal fund prices to forecast rate cut probabilities, expects a 71 percent chance of a 25-basis-point cut. Treasury bond traders are less sure, however. “I see an over-50 percent chance they go 50 basis points” as long as inflation data is “tame,” Tony Farren, a managing director of interest rate-based financial products at Mischler Financial GroupNow, told Bloomberg Friday (Sept. 6). The sentiment was echoed by Subadra Rajappa, Societe Generale’s head of U.S. rates strategy, in the same interview. The “tricky” jobs report left “investors guessing if the Fed will cut by 25 or 50 basis points at the September FOMC meeting,” she said.
“We think there’s a good case for hurrying up in their pace of rate cuts,” Michael Feroli, JPMorgan Chase’s chief U.S. economist, told CNBC last week, advocating for a 50 bps cut. Nobel Prize-winning economist Joseph Stiglitz also argued in a CNBC interview Friday that a 50-basis-point cut should be on the table.
Fed insiders seem supportive of a larger-than-expected cut as well. Christopher Waller, a member of the Federal Reserve Board of Governors, said on Friday (Sept. 6) in his remarks at the University of Notre Dame, “I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate.”