By How Much Will the Federal Reserve Cut Interest Rates in September?
After Federal Reserve Chair Jerome Powell has all but promised interest rate cuts at the upcoming Federal Open Market Committee meeting held on Sept. 17 and Sept. 18, the remaining question is how much. Markets are widely anticipating a 25-basis-point cut. But, after a weaker-than-expected August jobs report, economists are now weighing whether the central bank should double down and cut rates by 50 basis points.
The CME Group FedWatch, which uses 30-day forward federal fund prices to forecast rate cut probabilities, expects a 71 percent chance of a 25-basis-point cut. Treasury bond traders are less sure, however. “I see an over-50 percent chance they go 50 basis points” as long as inflation data is “tame,” Tony Farren, a managing director of interest rate-based financial products at Mischler Financial GroupNow, told Bloomberg Friday (Sept. 6). The sentiment was echoed by Subadra Rajappa, Societe Generale’s head of U.S. rates strategy, in the same interview. The “tricky” jobs report left “investors guessing if the Fed will cut by 25 or 50 basis points at the September FOMC meeting,” she said.
In August, the U.S. economy added 142,000 jobs, below the estimated 161,000, suggesting the labor market may be fraying. A Bureau of Labor Statistics report from last week revealed that employers have been hiring at the slowest pace since 2014. The unemployment rate is currently at 4.2 percent, which is not hugely worrisome but higher than the 3.8 percent a year ago. July’s jobs report was also weaker than expected.
“We think there’s a good case for hurrying up in their pace of rate cuts,” Michael Feroli, JPMorgan Chase’s chief U.S. economist, told CNBC last week, advocating for a 50 bps cut. Nobel Prize-winning economist Joseph Stiglitz also argued in a CNBC interview Friday that a 50-basis-point cut should be on the table.
Fed insiders seem supportive of a larger-than-expected cut as well. Christopher Waller, a member of the Federal Reserve Board of Governors, said on Friday (Sept. 6) in his remarks at the University of Notre Dame, “I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate.”
After two years of hiking rates to a 40-year high to combat inflation, Powell said at the Jackson Hole Economic Symposium last month that “the balance of the risks to our two mandates has changed,” referring to the Fed’s dual mission to keep both price growth and unemployment in check. As inflation continues to cool—2.9 percent in July, down from the 9.1 percent peak in 2022—rising unemployment is now the central bank’s focus.
The Fed’s next interest rate move still hinges on August’s inflation read, scheduled to come out tomorrow (Sept. 11)