Economists Bet on More Rate Cuts Ahead

Claudia Sahm, Chief Economist at New Century Advisors recaps this week's eco data and what she expects to see from the Federal Reserve's rate decision next week.

Cracks in the job market will likely prompt the Federal Reserve to execute a series of interest-rate cuts in the coming months, beginning with a reduction next week, according to economists surveyed by Bloomberg News.

The median respondent sees two cuts by year’s end, but a sizable minority — more than 40% — anticipates three reductions. Of those anticipating two moves, economists were almost evenly split over whether a second cut would come in October or December.

Investors are leaning more heavily in the direction of three rate cuts this year, with federal funds futures almost fully pricing in that scenario.

Almost 90% of respondents also expect Fed officials will change their post-meeting statement to emphasize greater attention to labor-market risks. The new statement will be released on Sept. 17 at 2 p.m. in Washington, with Chair Jerome Powell scheduled to hold a press conference 30 minutes later.

“The balance of risks surrounding the Fed’s dual mandate of price stability and maximum employment are swinging toward one, whereby the jobs market is the bigger concern,” James Knightley, chief international economist at ING, wrote in comments submitted with his responses.

The FOMC said after its July gathering that the labor market was still “solid,” but the latest economic data have challenged that view. The unemployment rate ticked up to 4.3% in August, and revisions pointed to a sharp slowdown in hiring in recent months. Last week, average monthly job growth in the year through March was also revised down by roughly half.

Powell opened the door to a rate cut during a speech in Jackson Hole, Wyoming in August, when he said a “shifting balance of risks” could warrant intervention by the central bank to prevent rising unemployment.

A strong week on Wall Street is ending on a quiet note, with stocks holding near all-time highs and bonds fell as consumer data did little to alter bets the Federal Reserve will cut rates in September.

Following a relentless surge to a record, the S&P 500 barely budged Friday. A gauge of megacaps jumped, led by a surge in Tesla Inc. Shares of vaccine makers slumped on a report that health officials plan to link Covid shots to the deaths of around two dozen children.

A modest slide in Treasuries trimmed an advance that put the market on pace for its fourth straight up week. The dollar was on track for its worst weekly slide in about a month.

Consumer sentiment hit the lowest since May and long-term inflation expectations rose. That follows recent data painting a picture of a slowing labor market, with investors leaning heavily in the direction of three rate cuts this year.

“The Fed is pulled in opposite directions by rising inflation on the one hand and a weak job market on the other,” said Bill Adams at Comerica Bank. “The Fed can be expected to cut rates further in coming months; the question is how much, not if.”

Cracks in the job market will likely prompt the Fed to execute a series of rate cuts in the coming months, beginning next week, according to economists surveyed by Bloomberg News. The median respondent sees two cuts by year-end, but a sizable minority — more than 40% — anticipates three reductions.

Deutsche Bank AG economists added a third cut to their forecast for the remainder of 2025. They previously expected officials led by Chair Jerome Powell would cut this month and then wait to ease again until December.

At Morgan Stanley, economists including Michael Gapen expect four straight rate cuts. Beyond January, they see officials pausing to assess inflationary impacts. Once that “noise” clears, they we anticipate further reductions in April and July.

And what about Fed guidance?

TD Securities strategists say that’s likely to “lean dovish” next week as a result of labor-market conditions — but not overly so given an inflation overshoot remains an important risk.

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