Recession is ‘much likelier’ without Fed rate cuts, strategists say

Wall Street bank Macquarie says the economy will run out of steam if the Fed doesn't cut rates soon enough
By Sam Bourgi
•
11 September 2024
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Expected rate cuts could be the only thing keeping the economy from sliding into a recession, say Macquarie bank strategists.

“We’re not saying that a recession is coming, but absent Fed rate cuts that will take place, a recession would be much likelier,” wrote strategists Thierry Wizman and Gareth Berry.

The strategists point to recent consumer sentiment data from The Conference Board, which reveals growing pessimism about the labor market.

According to the non-profit organization, this pessimism is a usual precursor to higher unemployment.

“What was worrisome was that respondents saying that jobs were hard to get inched higher, while those saying jobs were plentiful edged lower,” the Macquarie strategists said.

At least two labor market metrics—the Sahm indicator and the Schannep Recession Indicator—signal the economy has crossed a threshold that historically led to an economic downturn.

Both indicators track the magnitude of change in the unemployment rate to predict the beginning of a recession.

Although unemployment remains still relatively low by historical standards, its sharp rise over the past year has set off alarm bells.

Macquarie strategists didn’t specify which interest rate cuts would prevent a recession, but based on their assessment, larger reductions seem more appropriate.

According to the CME Group’s FedWatch Tool, there's nearly a 1-in-3 chance of a larger-than-normal rate cut in September.

However, economists say this could change if the Fed begins to take seriously the threat of a recession.

“The odds of a recession might be rising”

Macquarie is the latest Wall Street bank to suggest that the central bank’s priorities have shifted following recent employment data.

They recognize that rising unemployment, declining job openings, and weaker hiring trends all point to a weakening economy.

Although policymakers refuse to use the word recession to describe current economic trends, they’ve acknowledged the risks of keeping interest rates elevated.

In his quarterly essay, Atlanta Fed boss Raphael Bostic said keeping interest rates too high “could inflict unnecessary pain and suffering.”

“We must not maintain a restrictive policy stance for too long,” said Bostic.

Meanwhile, Chicago Fed President Austan Goolsbee has acknowledged that “the odds of a recession might be rising.”

For this reason, the Fed’s top priority should be “not letting things turn into something worse,” he said.

According to New York Fed President John Williams, policymakers are now at a point where inflation is no longer their top concern.

He thinks it’s “now appropriate to dial down the degree of restrictiveness” in the federal funds rate.

The New York Fed’s analysis of the Treasury spreads between 10-year bonds and 3-month bills suggests a 61% probability of a recession in the next 12 months.

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