Schroder Investment: US economy is slowing down, will cut interest rates by 25 basis points for the first time in September
Schroder Investment pointed out that the US economy is slowing down and is expected to cut interest rates for the first time by 25 basis points in September 2024. Powell admitted at the Jackson Hole meeting that the labor market is cooling down, hinting that the timing of rate cuts depends on future economic data. The futures market believes that there is a one-third chance of a rate cut in September. Schroder Investment emphasizes the need to be cautious about monetary policy to avoid the risk of economic recession. Ultimately, the Federal Open Market Committee may adjust interest rates based on economic developments, thereby affecting inflation
According to the Wisdom Financial APP, Schroders Investment published an article stating that Jerome Powell delivered a highly anticipated speech at the Jackson Hole Global Central Bank Annual Meeting, providing key forward-looking guidance. He acknowledged a clear cooling in the labor market and stated that policymakers have sufficient room to address more pronounced deteriorations. However, he emphasized that the timing and pace of rate cuts depend on upcoming economic data, evolving economic outlook, and risk balance.
Powell stated that he is neither seeking nor welcoming further cooling in the labor market, with financial markets perceiving his remarks as slightly dovish. This provides room for a 50 basis point rate cut in September 2024. Currently, the futures market indicates a one-third probability of this scenario occurring, compared to around 25% previously.
This could be a mistake. Not only would it blur the information about the future pace of monetary policy easing, but it could also exacerbate concerns about an economic recession. From Schroders Investment's perspective, the U.S. economy is slowing down but remains robust. Considering the uncertainty of the natural rate (R-star), which is the real interest rate at which the economy is in equilibrium, it is necessary to adopt a cautious and data-dependent approach to remove constraints on policy.
Schroders Investment still believes that the Federal Open Market Committee (FOMC) will cut rates by 25 basis points for the first time in September, assuming a rebound in U.S. employment data in August after the hurricane impact subsides, followed by quarterly rate cuts.
The extent of Fed rate cuts will depend on the development of the U.S. economy, but forecasts suggest that cutting rates by 100 basis points by mid-2025 or earlier will help support economic growth while effectively curbing inflation.
However, Powell's remarks suggest that concerns about the labor market may prompt the committee to lower rates more quickly to a lower restrictive level. Analysis shows that if the Fed implements an aggressive rate cut as expected by financial markets, it could potentially lead to renewed price pressures and force the FOMC to raise rates again. Therefore, the committee should remain calm at this critical moment