Prepare for massive interest rate cuts, Wall Street predicts

After a disastrous July job report, economists at JPMorgan, Bank of America, Goldman Sachs, and Citigroup expect the Federal Reserve to make aggressive interest rate cuts at its next two meetings.

Citigroup economists led by Veronica Clark and Andrew Hollenhorst predict 0.5% cuts in September and November, followed by a 0.25% cut in December.

Michael Feroli, an economist at JPMorgan, made a similar forecast while adding that there’s “a strong case to act” before the Fed’s next scheduled meeting on Sept. 18. T

his implies that policymakers may make an emergency rate cut, as they did during Covid.

“With the benefit of hindsight, it’s easy to say the Fed should have cut this week,” Feroli wrote, referring to the central bank’s July meeting.

“Even if the softening in labor market conditions moderates from here going forward, it would seem the Fed is at least 100 basis points offsides, probably more,” he explained.

While economists at Goldman Sachs aren’t as aggressive in their forecasts, they now expect the Fed to cut rates at its final three meetings of 2024.

A 0.5% cut in September “would become more likely” if the next jobs report shows further weakness in hiring and unemployment, wrote Goldman economist Jan Hatzius.

Economists agree that the U.S. economy is slowing faster than the Fed expects, which is why they say policymakers need to act soon.

Was the July nonfarm payrolls report really that bad?

U.S. employers added just 114,000 workers in July, much lower than the 185,000 economists expected before the release. But that wasn’t the worst part of the report.

The unemployment rate rose from 4.1% to 4.3% in July, the highest since October 2021. Unemployment has now risen by nearly one full percentage point since the start of 2023.

The spike caused the unemployment rate’s three-month moving average to rise by half a percentage point from its 12-month low. According to the Sahm Rule, that marks the beginning of a recession.

Combined with multiple downward revisions for the previous months, the economy has “lost most of the gains we saw from the first quarter of the year,” said Becky Frankiewicz, president of the ManpowerGroup.

Jeffrey Roach, chief economist at LPL Financial, said it’s too early to declare a recession, but that “early warning signs suggest further weakness.”

Although the July jobs may have lit a fire under the Fed's feet, policymakers have already recognized the need to shift to a more balanced approach to monetary policy.

At their July meeting, the Fed admitted that the central bank needs to be “attentive to both sides of its dual mandate,” referring to managing inflation and promoting full employment.