The Federal Reserve is expected to drop interest rates by just a quarter-point at their upcoming September meeting, according to a majority of economists surveyed.
Almost 80% of them believe the Fed will settle for a modest reduction, bringing the rates down to a range of 5% to 5.25%.
Only a few think a larger cut is on the table, and the chances of an unscheduled rate adjustment are slim, sitting at about 10%.
Fed policymakers aren’t too keen on aggressive moves right now. Why? Well, the July jobs report was a bit of a letdown. Hiring slowed down, and the unemployment rate hit its highest point in nearly three years.
Despite this, Fed leaders, led by Jerome Powell, are sticking to their guns. They’re focused on two things: keeping employment high and bringing inflation down to their 2% target.
The Fed isn’t rushing
Some heavy hitters on Wall Street, like JPMorgan Chase and Citigroup, are now calling for a half-point rate cut next month after seeing the latest jobs numbers.
Futures investors seem to agree, pricing in a total of a 100-basis-point reduction by the end of the year. They’re thinking the Fed might start with a 50-basis-point cut in September.
But the economists aren’t buying it. They think the Fed will play it safe with smaller, quarter-point cuts not just in September, then also in November, December, and even into early 2025.
The big question on everyone’s mind: what’s happening with inflation? It’s likely that US inflation nudged up slightly in July, but not enough to spook the Fed.
The consumer price index (CPI) is expected to have increased by 0.2% from June. This small bump would still keep the annual inflation rate at one of the slowest rates since early 2021.
Jobs report puts pressure on rate cut decision
The easing of inflation has given Fed officials some breathing room, allowing them to consider cutting rates without losing focus on the labor market.
But let’s not get too excited—hiring is slowing down, and the unemployment rate keeps climbing. The July jobs report showed that US employers are pumping the brakes on hiring.
This has set off alarm bells, because a recession could be on the horizon. If the CPI numbers come in as expected, it would confirm that inflation is still heading in the right direction—downward.
The economists think we might see a small uptick after June’s surprisingly low reading, but nothing to worry about too much. This could be due to rising costs in core services, excluding housing, which the Fed keeps a close eye on.
There’s also a chance that goods prices might go up, thanks to higher shipping costs, but we’ll have to wait and see.
Even with all the recent drama in the markets and the economy, most economists (69%) think the US will manage to avoid a recession. They’re betting on a “soft landing,” where the economy slows down but doesn’t crash.
Another 10% think a soft landing is possible, but only if the Fed takes quick, aggressive action. 22% of those surveyed believe a recession is inevitable.
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