JPMorgan, Citi Expect Two Supersized Rate Cuts This Year

Wall Street banks are calling for aggressive interest rate cuts by the Federal Reserve based on the latest evidence that the labor market is cooling.

Economists at Bank of America Corp., Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc., and JPMorgan Chase & Co. revamped their forecasts for U.S. monetary policy Friday after data showed the U.S. unemployment rate rose again in July. All are calling for earlier, bigger, or more interest rate cuts.

Citigroup economists expect half-point rate cuts in September and November and a quarter-point cut in December, having previously predicted quarter-point cuts at all three meetings. Further, Veronica Clark and Andrew Hollenhorst predict, the Fed will reduce rates by another quarter point at each meeting until mid-2025, bringing the policy band to 3 percent to 3.25 percent.

JPMorgan economist Michael Feroli went a step further. While he also predicts half-point rate cuts in September and November, followed by quarter-point reductions at every subsequent meeting, Feroli said there’s “a strong case to act” before the next meeting on September 18. However, Fed Chair Jerome Powell may not “want to add more noise to what has already been an event-filled summer,” he wrote.

Friday’s jobs report showed U.S. hiring slowed markedly while the unemployment rate rose to 4.3 percent, the highest in nearly three years. The rise in the jobless rate caused its 3-month moving average to exceed the 12-month low by half a percentage point. According to the Sahm rule—devised by former Fed economist Claudia Sahm—that means a recession is under way.

That fueled a further rally in the Treasuries market, with the policy-sensitive two-year yield tumbling as much as 31 basis points (bps), to 3.84 percent, the lowest since May 2023, before paring the drop.

Fed policymakers met earlier this week and signaled they are on course to start lowering borrowing costs as soon as September from the two-decade high reached a year ago. In a news conference after the meeting, however, Powell said a half-point cut was “not something we’re thinking about right now.” He also reiterated that the Fed “is prepared to respond” to unexpected labor-market weakness.

“With the benefit of hindsight, it’s easy to say the Fed should have cut this week,” JPMorgan’s Feroli wrote. “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.”

Interest rate swaps show that traders see a more than 70 percent chance of a half-point move in September, and are pricing in a total of about 119 bps of reductions by yearend. In fed funds futures, a wave of buying swept the market Friday, consistent with bank calls for aggressive easing.

The price action harkens back to the divide that existed at the start of the year, when forecasts for as many as six quarter-point cuts this year mirrored market-implied expectations. Fed policymakers at that point were anticipating easing by 75 bps, based on their median forecast, which in June changed to 25 bps.

Speaking on Bloomberg Television Friday afternoon, Chicago Fed President Austan Goolsbee said the central bank won’t overreact to any one piece of economic data, echoing comments by Powell on Wednesday.

Economists at Barclays, Goldman Sachs, and TD Securities added a third quarter-point rate cut, in November, to their previous 2024 forecast for September and December moves after the jobs report. While the July data may overstate weakness in the labor market, if the August report is also soft, a half-point rate cut in September “would become likely,” Goldman economists led by Jan Hatzius wrote in a note.

Bank of America economists led by Michael Gapen, who’d been a holdout for rate cuts beginning in December, said they now look for the first move in September.

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