Federal Reserve Faces Pressure to Cut Rates by 50 Basis Points in September

Following the release of a pivotal non-farm payroll report, expectations on Wall Street are rapidly shifting. The latest insights from the trading and research team suggest that the emerging signs of economic weakness in the United States have left the Federal Reserve with little choice but to initiate a rate-cutting cycle. The market's focus has shifted from whether to cut rates to the extent of the cuts, with a debate looming over whether to reduce rates by 25 or 50 basis points in September.

The investment bank suggests that the market is currently underestimating the likelihood of the Federal Reserve taking more aggressive measures, such as a one-time 50 basis point cut, at its September meeting. This assessment is based on recent employment data and significant downward revisions, which have substantially increased the risk of an economic "hard landing."

During an internal macroeconomic conference call, a senior executive from the Fixed Income, Currency, and Commodities (FICC) division emphasized that, regardless of the inflation data over the next two months, rate cuts have become the baseline scenario for the Federal Reserve. The executive believes that some members of the Federal Open Market Committee (FOMC) may already regret not taking action at the previous meeting in July.

This assessment implies that investors and the market need to prepare for the possibility of the Federal Reserve taking more accommodative actions than expected. The executive anticipates that discussions about whether to cut rates by 25 or 50 basis points will dominate the market agenda over the coming months and will also be relevant for the December policy meeting.

The non-farm payroll report, described as a "game-changer," is based on several key data points. The executive highlighted that the number of new jobs created in the U.S. economy over the past three months, particularly in the private sector, has reached its lowest level. The report indicates that the U.S. economy added only 73,000 jobs in July, far below expectations, and the previous two months' data were revised down by 258,000. The labor market is not just experiencing a "moderate slowdown" but an "abrupt deceleration," which could trigger new recession concerns.

Meanwhile, the unemployment rate has shown signs of a slight increase. These signals collectively point to a weakening momentum in the labor market. Given the Federal Reserve's close attention to the labor market to assess its policy path, this report carries significant weight and provides strong support for those advocating for an early easing of monetary policy.

The sluggish labor market is part of a broader picture of economic slowdown. The analysis underscores that U.S. consumers are "clearly feeling the pressure." This observation is corroborated by other macroeconomic data. According to the executive's analysis, the growth rate of real final sales in the U.S. for the first half of the year has slowed compared to the same period last year, excluding specific factors. More broadly, the GDP growth rate for this year is expected to be about 100 basis points lower than last year. These data collectively paint a picture of weakening growth momentum and challenges in domestic demand, increasing the urgency for the Federal Reserve to act.

Based on this analysis, the Federal Reserve's policy path has become increasingly clear. The executive asserts that the Federal Reserve has "no choice" but to cut rates, reducing the importance of inflation data over the next two months in the decision-making process. Therefore, the September FOMC meeting will no longer be about whether to cut rates but about the magnitude of the cuts. The investment bank believes that policymakers will weigh whether to cut rates by 25 basis points or more decisively by 50 basis points. This expectation itself marks a significant shift in market sentiment and could continue to influence asset price volatility ahead of the meeting.

If data deteriorates further, a 50 basis point cut is on the table. The executive predicts that, under baseline conditions, the Federal Reserve will cut rates by 25 basis points in September, October, and December. The executive also notes that dovish forces within the Federal Reserve are rallying, potentially clearing the way for earlier and faster rate cuts.