FILE PHOTO: JPMorgan Chase Bank is seen in New York City, U.S., March 21, 2023. REUTERS/Caitlin Ochs/File Photo
New York: Wall Street banks are calling for aggressive interest-rate cuts by the US Federal Reserve (Fed) based on the latest evidence that the labour market is cooling.
Economists at Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co revamped their forecasts for US monetary policy last Friday 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 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%, 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 there’s “a strong case to act” before the next meeting on Sept 18. Fed chair Jerome Powell may not “want to add more noise to what has already been an event-filled summer”, however, he wrote.
Last Friday’s jobs report showed US hiring slowed markedly while the unemployment rate rose to 4.3%, 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.
Fed policymakers met earlier and signalled 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 a half-point cut was “not something we’re 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 wrote.
“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% chance of half-point move in September, and are pricing in a total of about 115 basis points of reductions by year-end. — Bloomberg
