Wall Street Big Shots: The Federal Reserve will cut interest rates by 25 basis points in September, and this will be the only time this year

While many analysts expect the Federal Reserve to cut interest rates multiple times this year, renowned economist and President of Yardeni Research, Ed Yardeni, has a different view. He believes that the Federal Open Market Committee (FOMC) will only implement a mild rate cut once this year.

The soft job report at the beginning of this month has raised concerns about an economic recession, strengthening expectations of a rate cut in September. However, Yardeni downplays the impact of this job report and cites consumer resilience as the reason for predicting only one rate cut this year.

Yardeni told CNBC on Monday, "The market is very dovish, expecting a 25 or 50 basis point cut in September, and even speculating on a 100 basis point cut by the end of the year."

However, he believes that the Fed will cut rates by 25 basis points at the September meeting, and only once this year. "The economic performance is just too good. I know people were scared by the last job report, but I think a large part of it was due to weather reasons, and other indicators confirm this," he said.

The July job report from the U.S. Department of Labor showed a decrease in job creation in July compared to June, with forecasters expecting 175,000 new jobs in July but only 114,000 were added. The unemployment rate rose from 4.1% to 4.3%, prompting calls for an emergency rate cut to ensure the Fed's mission of full employment.

However, since then, those who supported a significant rate cut, including Wharton School professor Jeremy Siegel, have retracted their views.

In his weekly commentary for WisdomTree this week, the University of Pennsylvania's esteemed professor admitted, "Of course, the data is stronger than I (and many others) expected. Particularly surprising is the decline in initial jobless claims, which, after breaking through the ceiling, is now approaching the midpoint of my range of 200,000 to 240,000."

But Siegel still believes that now is the time to lower the benchmark interest rate, saying that based on a series of forward-looking policy rules, the benchmark rate should be below 4%. This would mean a significant drop in rates from the current range of 5.25% to 5.5%, which has been at a two-decade high.

Yardeni does not believe that the data has cooled enough to warrant Powell and his colleagues going to such lengths, adding, "If I'm not mistaken... before the FOMC meeting in September, they will receive some indicators showing a vibrant economy, a well-performing labor market, and continued inflation slowdown. Therefore, I think 25 basis points will suffice, and I think this might be the message Powell will convey. It will be dovish, but not as dovish as the market expects."

Analysts around the world still believe that the Federal Reserve will cut interest rates multiple times this year Claudio Irigoyen and Antonio Gabriel of Bank of America wrote in a report earlier this month: "Stable economic activity and mostly positive news on inflation make us confident in the Fed's calls for 25 basis point rate cuts in September and December."

Investment firm Vanguard, managing $9.3 trillion in assets, stated in its monthly update released this week: "Recent data suggests that the labor market is softening, and the Fed seems to have taken notice. The Fed sent a strong signal in July, preparing to cut the federal funds rate target by 25 basis points in September. Now we expect another 25 basis point cut this year, with rates targeting 3.25%-3.5% by the end of 2025."

Goldman Sachs is even more dovish. A Q&A shared by the bank's US chief economist David Mericle stated: "We expect the Fed to cut rates by 25 basis points at the September, November, and December meetings, followed by quarterly cuts starting next year, ultimately bringing rates down to 3.25%-3.5%."

He also mentioned: "We believe that the rise in the unemployment rate so far and other signs of weakness in the labor market are sufficient to prompt the FOMC to accelerate its initial pace... but not enough to cut by 50 basis points. Comments from Fed officials since the July jobs report are consistent with our expectation of a 25 basis point cut in September. A weaker-than-expected August jobs report is most likely to prompt a larger rate cut in September."