Michael Feroli, Chief U.S. Economist at JPMorgan Chase, stated that the Federal Reserve should decisively cut interest rates by 50 basis points at its September meeting.
In an interview on Thursday, Feroli said, "We believe the Federal Reserve should restore rates to a neutral stance as soon as possible." He further explained that the Fed's neutral rate target is around 4%, and the current rate level is about 150 basis points higher. Hence, accelerating the pace of rate cuts is reasonable.
According to the CME FedWatch tool, traders currently predict a 40% chance that the Federal Reserve will cut the federal funds rate from the existing 5.25%-5.50% to 4.75%-5%, and a 60% chance of cutting it to 5%-5.25%.
Feroli also added, "If we wait until the inflation rate drops entirely to 2%, the optimal time may have already been missed. Although the inflation rate is still slightly above the target, the unemployment rate is approaching the threshold of full employment. There are risks related to both employment and inflation, and if these risks materialize, the Federal Reserve still has the opportunity to adjust its policy."
These statements were made as the August ADP data showed the weakest employment growth since January 2021. The unemployment rate in July also slightly rose to 4.3%, triggering the "Sahm Rule" recession warning indicator.
Nevertheless, Feroli believes the current economy is not in a state of "collapse." He pointed out, "If the economy really collapses, the Federal Reserve may cut rates by more than 50 basis points at the next meeting."
Analysts at Citibank also support a 50-basis point cut. They believe that the labor market is not only weaker than before the pandemic but is also cooling down faster. If the upcoming non-farm payroll data further confirms this trend, the Federal Reserve may cut rates by 50 basis points in September and again in November.
However, some analysts are cautious about cutting rates by 50 basis points, fearing it might send the wrong signal. David Sekera, Chief U.S. Market Strategist at Morningstar, said that a large rate cut could make the market think an economic recession is imminent, thereby causing unnecessary panic and leading to further stock market declines.
George Lagarias, Chief Economist at Forvis Mazars, shares a similar view, arguing that a 25-basis point rate cut would be more reasonable. He noted, "There is no urgency for a 50-basis point rate cut, and it might send the wrong signal to the market and economy. Unless there is clear economic turmoil, such drastic action is unnecessary."
Despite recent data raising concerns about an economic slowdown, Lagarias still believes that the U.S. economy is far from a recession. He pointed out, "While the job market has weakened, it's the result of increased supply rather than decreased demand. The economic slowdown is an anticipated adjustment, and there are no clear signs of a recession yet, so the Federal Reserve is unlikely to adopt overly aggressive policies."
Mohit Kumar, Chief Financial Economist for Europe at Jefferies, also warned the Federal Reserve against a significant rate cut this month. In an interview, he stated that the current economic conditions do not urgently require a 50-basis point rate cut.
The Federal Reserve will decide on its future rate policy at its meeting on September 17-18.
