The pressure on the Federal Reserve to cut rates is rising in the wake of heavy selling on Wall Street and a disappointing jobs report that's stoked recession fears.
Traders are now betting the Fed will act more aggressively in the remaining months of 2024.
They expect rate cuts of half a percent in both September and November and another quarter-point cut in December. Previously traders were looking at two quarter-point cuts for the rest of this year.
JPMorgan chief economist Michael Feroli suggests there is even a growing argument for a rate cut before the next scheduled policy meeting on Sept. 17-18.
There is a "strong case to act before September," he said in a research note.
The Fed looks to be "materially behind the curve," added Feroli, who expects a 50-basis-point cut at the September meeting followed by another 50-basis-point cut in November.
Wilmer Stith, bond portfolio manager for Wilmington Trust, doesn't expect a cut outside of a regularly scheduled meeting because that might spook investors. Normally the Fed reserves such moves for times of extreme crisis.
“If things continue to fall out of bed at the rate that they seem to be falling, anything is possible," Stith said, "but I think it’s unlikely that they move inter-meeting because I think that's just going to put more fear into the market."
A 50-basis-point cut could be a reasonable outcome for September, he added, but that depends on the data that comes out between now and then.
"I don't think we're at a point where the Fed needs to come in and do [an inter]-meeting emergency rate cut," Wells Fargo head of global fixed income strategy Brian Rehling told Yahoo Finance.
"We may get to that point" if "something breaks, if something deteriorates faster," he added, but "we are not there today."
Fed Chair Jay Powell was dismissive of the idea of a 50-basis-point cut when asked about it at a press conference last Wednesday, making it sound like a 25-basis-point cut was more likely for September if the Fed decides to act.
"I don't want to be really specific about what we're going to do, but that's not something we're thinking about right now," Powell said at the press conference. "Of course we haven't made any decisions at all as of today."
Powell will have another chance to give his thoughts on the path of monetary policy when he gives a speech in roughly two weeks at the Fed’s annual confab in Jackson Hole, Wyo.
The scrutiny of the Fed first intensified last Friday with new signs of a cooling labor market.
Data from the Bureau of Labor Statistics released Friday showed the US economy added 114,000 nonfarm payroll jobs in July, fewer than the 175,000 expected by economists. The unemployment rate rose to 4.3% — its highest level since October 2021.
The new numbers reinforced concerns among some Fed watchers that the central bank should have decided at its July 30-31 meeting to lower rates for the first time in four years — to get ahead of a slowing US economy before it tips into a recession.
Policymakers decided instead to keep rates at a 23-year high.
Stith said he doesn’t think the jobs report portends a recession, but traders had not priced in an economic slowdown — which explains some of the selling on Wall Street as positions are unwound.
One Fed official, Chicago Fed president Austan Goolsbee, told Bloomberg Friday that the central bank wouldn't overreact to one report, and that policymakers will get a lot of data before the Fed’s next meeting.
However, Goolsbee did note that if rates stay restrictive too long and unemployment rises, policymakers have to think about responding.
"I do think that 50-basis-point rate cut should be on the table," Baird strategist Ross Mayfield told Yahoo Finance Friday. "I think the Fed will consider it."
"You know, I think, with hindsight, it's clear they probably should've started cutting in July."
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