Fed faces pressure to cut rates

The ongoing debate on Fed policy is focused on whether the Fed should cut inter-meetings or in September, and by how much.
It needs to go beyond this and also focus on the opportunity Chair Powell has at Jackson Hall to regain control of the narrative and anchor forward policy…

— Mohamed A. El-Erian (@elerianm) August 6, 2024

The Federal Reserve finds itself in a precarious position as markets anticipate sizable interest rate cuts to head off a potential recession. Traders are pricing in a half-point cut in September, followed by aggressive easing that could lower the Fed’s short-term borrowing rate by 2.25 percentage points by the end of next year. Steve Blitz, chief U.S. economist at TS Lombard, stated, “No recession today, but one is increasingly inevitable by year-end if the Fed fails to act.” He believes the process would likely begin with a half-point cut in September, telegraphed in late August.

From this morning’s @opinion article (link below) on why “The Fed Should Resist Placating Markets.”https://t.co/6feK9zwIXG#economy #markets #FederalReserve #investing #investors #econtwitter pic.twitter.com/eC57EQGN7p

— Mohamed A. El-Erian (@elerianm) August 6, 2024

Citigroup economist Andrew Hollenhorst noted, “The unfortunate reality is that a range of data confirm what the rise in the unemployment rate is now prominently signaling — the US economy is at best at risk of falling into a recession and at worst already has.” He expects data in the coming month to confirm a continued slowdown, making a half-point cut in September likely. Despite the market still creating jobs and stock market averages near record highs, an emergency cut between now and the Sept. 17-18 open market committee seems unlikely.

Current Market expectations for Fed Rate Cuts…
-Sep 18, 2024: 50 bps cut to 4.75-5.00%
-Nov 7, 2024: 25 bps cut to 4.50-4.75%
-Dec 18, 2024: 25 bps cut to 4.25-4.50%
-Jan 25, 2025: 25 bps cut to 4.00-4.25%
-Mar 19, 2025: 25 bps cut to 3.75-4.00%

Video: https://t.co/PU3gn1fTbD pic.twitter.com/xuqDaimCyG

— Charlie Bilello (@charliebilello) August 7, 2024

However, Bank of America economist Michael Gapen states, “If the question is, ‘should the Fed consider an intermeeting cut now?’, we think history says, ‘no, not even close.’

My latest @WSJopinion on where the Fed is and where it should be going, they gave it the apt subtitle: "Jerome Powell must be wishing he had cut rates last week. He still has time to catch up to the market."https://t.co/aCvyjUVeD9

— Jason Furman (@jasonfurman) August 5, 2024

The Fed is expected to cut rates almost as swiftly as it raised them from March 2022 to July 2023.

Fed faces recession fears

This process could start later this month when Fed Chair Powell delivers a keynote policy speech during the Fed’s annual retreat in Jackson Hole, Wyoming. Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities, expects the Fed to cut rates by 3 full percentage points by the end of 2025, more aggressively than the current market outlook. He asserted, “Go big or go home. The Fed has clearly said that rates are too high. Why would they be slow at removing the tightness?” Goldman Sachs recently raised its recession forecast to 25% from 15%, citing that the Fed has substantial room to cut rates if necessary. However, any quakes in the data, such as a downside surprise to nonfarm payroll numbers, could quickly reignite recession fears. Economist and strategist David Rosenberg, founder of Rosenberg Research, wrote, “The Fed is as behind the economic curve now as it was behind the inflation curve back in 2021-2022.” He added that the heightened expectation for rate cuts “smacks of a true recession scenario because the Fed has rarely done this absent an official economic downturn.” As the markets continue to closely watch the Fed’s next moves, it is clear that the potential for recession hinges significantly on the Federal Reserve’s ability to act decisively and timely.