"Rate Cuts Won’t Save a Slowing Economy, J.P. Morgan Warns"

J.P. Morgan’s Chief U.S. Economist, Mike Feroli, has highlighted that the U.S. economy is showing signs of a gradual slowdown, according to recent data and analysis. This assessment comes as the Federal Reserve faces mounting pressure to cut interest rates in response to a weak jobs report and slowing growth metrics. Feroli does not believe that the anticipated rate cuts will significantly fuel economic growth, a stance supported by recent economic performance and the mixed signals coming from key indicators.

The U.S. Bureau of Economic Analysis (BEA) reported that real GDP fell by 0.5% in the first quarter of 2025, reversing the 2.4% growth recorded in the fourth quarter of 2024. This contraction was primarily attributed to a rise in imports and a decline in government spending, although some offset was seen from increased consumer and investment spending. Despite a rebound in the second quarter—with real GDP growth revised to 3.3% from an initial 3%—the first half of the year saw an average annualized growth rate of just 1.4%, underscoring the fragility of the recovery.

The data highlights a broader slowdown in private-sector demand beyond the AI-driven investment surge. EY-Parthenon chief economist Gregory Daco noted that much of the Q2 growth was driven by a sharp drop in imports, which had been elevated in the prior quarter due to business stockpiling in anticipation of tariffs. This, he argues, creates a misleading perception of strength in economic activity, masking underlying weakness.

Amid these economic headwinds, the Federal Reserve is poised to make a significant interest rate cut in its September meeting. A weak jobs report, showing far fewer job additions than expected in August, has shifted the central bank’s focus from inflation to the risks of a tightening labor market. Market expectations now anticipate a 14% chance of a 50-basis-point cut, bringing the benchmark rate to a range of 3.75% to 4%. This move aims to reduce borrowing costs and stimulate hiring, but J.P. Morgan’s analysis suggests that its stimulative effect may be limited given the broader structural slowdown in economic activity.

The Federal Reserve’s decision comes amid a delicate balancing act between its dual mandate of maintaining price stability and supporting maximum employment. While inflation remains above the central bank’s 2% target and incoming tariffs threaten to push it higher, the labor market’s weakening momentum appears to have tipped the scales in favor of accommodative policy. Morningstar chief U.S. economist Preston Caldwell has remarked that a rate cut is now “virtually guaranteed” after the latest employment data, with the Fed likely to prioritize employment concerns moving forward.

Looking ahead, the revised GDP data and the Federal Reserve’s upcoming action will be closely watched by investors and analysts. LPL chief economist Jeffrey Roach noted that the upward revision in Q2 growth raises expectations for the third quarter, though he cautioned that slowing job growth suggests the economy may struggle to maintain the same pace. The Fed’s next move will be critical in shaping market expectations and determining whether further rate cuts will be needed to support growth in an increasingly uncertain economic landscape.

Source:

[1] U.S. Economy at a Glance (https://www.bea.gov/news/glance)

[2] US Economy Grew at a Faster Pace in Q2 Following Commerce Department Revision (https://www.heattreat.net/news/us-economy-grew-at-a-faster-pace-in-q2-following-commerce-department-revision)

[3] Fed Rate Cut Now Appears Certain After Weak Jobs Report (https://www.investopedia.com/job-report-seals-federal-reserve-interest-rate-cut-in-september-11804268)