Despite public outcry, don’t bet on large Fed rate cuts, economists say

The public and politicians are calling on the Fed to make an aggressive rate cut before September, but experts say that’s unlikely to happen.

According to Bloomberg’s latest survey of economists, nearly 80% of respondents think the Fed will cut interest rates by just 0.25% at its Sept. 17-18 policy meeting.

And contrary to expectations, there’s also virtually no chance of an emergency rate cut by that time.

Instead, economists predict gradual, quarter-point reductions through March 2025. By that time, the federal funds rate is expected to be 4.5%, or one full percentage point lower than the current rate.

Calls for large rate cuts “are overdone and a knee-jerk reaction,” Ryan Sweet, chief U.S. economist at Oxford Economics, told Bloomberg.

“Historically, the Federal Open Market Committee has delivered intermeeting cuts and cuts larger than 0.25% when there was a clear negative economic shock or when the data were worse than they have been so far.”

Currently, central bankers think the chance of a recession or a “negative economic shock” is relatively low.

The Bloomberg survey diverges from recent calls by Wall Street titans like JPMorgan, Goldman Sachs, Bank of America, and Citigroup. Economists at these institutions believe large rate cuts are likely in September, November, and even December.

Goldman’s Jan Hatzius believes a 0.5% rate cut in September would become more likely if the next jobs report is another disappointment, indicating a weakening economy.

Attention shifts from inflation to employment

Calls for jumbo-sized rate cuts picked up earlier this month after weaker-than-expected jobs market stoked fears of a recession.

According to the Bureau of Labor Statistics, the economy added just 114,000 jobs in July, and the unemployment rate rose to 4.3%, the highest in nearly three years.

The report also marked the beginning of a technical recession based on the Sahm Rule. It's triggered when the unemployment rate’s three-month moving average increases by half a percentage point or more from its 12-month low.

This was a disastrous report for the Fed, which only two days earlier said economic conditions were stable as it voted to leave rates on hold.

Many economists believe the Fed should have cut interest rates because inflation has declined 90% from its peak. According to them, inflation is on track to reach the central bank’s 2% target over the next year.

“Unemployment/payrolls data is the new CPI,” wrote macroeconomist Alex Kruger, referring to the fact that employment data will now influence the Fed’s actions more than inflation.

“If you want to keep it simple, then simply focus on how data comes in versus expectations,” he explained.

The Bureau of Labor Statistics will release the August jobs report on Sept. 6.