Traders at the New York Stock Exchange are closely watching the Federal Reserve as anticipation mounts for its next policy meeting scheduled for September 17. While there is a strong consensus among Wall Street analysts that a quarter-point interest rate cut is on the horizon, the prospect of a more significant reduction of half a percentage point remains a possibility, albeit a remote one.
Current market conditions indicate an 88% likelihood of a 25 basis point cut in the overnight funds rate, according to data from the CME Group’s FedWatch tool, which evaluates market expectations based on 30-day fed funds futures contracts. However, there lingers a 12% chance that the Federal Open Market Committee (FOMC) may opt for a larger cut, reminiscent of the decision made during last September’s meeting.
Market sentiment shifted notably after the release of the August jobs report, which revealed a mere 22,000 jobs added to nonfarm payrolls and a rise in the unemployment rate to 4.3%, the highest level in almost four years. This data has fueled expectations that the Fed might reconsider its monetary policy approach. Citigroup economist Andrew Hollenhorst expressed in a recent note that the disappointing labor figures could push the committee toward rate cuts, emphasizing the need for a focus on economic weakness over inflation concerns.
While there could be some support among committee members for a more aggressive half-point cut, Hollenhorst speculated that a majority might resist such a move. Potential supporters for a larger reduction could include Fed Governors Michelle Bowman and Christopher Waller, along with Stephen Miran, pending his Senate confirmation.
Citigroup’s outlook suggests an unconventional stance that the Fed could implement cuts in each of its next five meetings. This perspective hinges on the belief that inflation concerns will be overshadowed by growing concerns about the labor market. Similarly, Nomura economist David Seif highlighted that the recent employment data strengthens the argument for a series of precautionary cuts, although he cautioned that officials may still await clearer signs of labor market weakness or significant changes in financial conditions before pursuing more aggressive easing measures.
Market narratives indicate an expectation that the Fed will cut rates next week, take a pause in October, and potentially lower rates again in December. Historically, since the FOMC began holding press conferences after each meeting in 2019, it has been uncommon for the Fed to skip meetings during periods of ongoing rate adjustments.
Economist Torsten Slok from Apollo stressed the delicate position policymakers find themselves in, balancing the conflicting dual mandates of stable prices and full employment amidst a soft jobs market and persistent inflation rates. As the Fed prepares to receive crucial inflation data on producer and consumer prices later this week—the last major indicators before the upcoming meeting—analysts speculate that a higher-than-expected consumer price index (CPI) could solidify the case for a quarter-point reduction.
Slok pointed out that upside inflation surprises could complicate the Fed’s decision-making process, raising questions about how to juggle the dual mandates when one suggests cutting rates while the other leans toward hiking them. Despite the challenges, he maintains that the Fed is likely to gravitate toward easing measures while increasingly focusing on future inflation expectations rather than current rates.
