British fund manager ABDRN expects a soft landing for the U.S. economy, but Kenneth Akintewe, the firm's head of Asian sovereign debt, said there was still a risk of a prolonged slowdown in the U.S. economy in 2025.
Argentewi asked CNBC’s “Squawk Box Asia” on Monday: “Has the Fed sleepwalked into a policy mistake?”
He cited economic data such as nonfarm payrolls, saying they reflected a weaker economic situation after revisions. The U.S. Labor Department reported that from April 2023 to March 2024, the U.S. economy created 818,000 fewer jobs, or nearly 30%, than the 2.9 million initially reported.
“Is the economy weaker than the data suggests and should the Fed have eased policy earlier?” Akintwe asked.
He added that it takes time for the Fed’s policy changes to affect the economy, “so if the economy is weaker than the data suggests, they need to accumulate enough easing, like 150, 200 basis points of rate cuts, and that takes time. Once you take that much easing, it takes six to eight months for that to be passed through the economy.”
Akintwe said that if the economy suddenly showed more signs of weakness in early 2025, the effects of any easing would not be seen in the economy until the second half of 2025, and the economy at that time might be a "very different" scenario.
He also believes that the market is too focused on anticipating the size of any potential rate cuts, asking, "Another question that no one seems to be asking is, with inflation down to nearly 2.5%, why is the policy rate at 5.5%? That is, in an environment with all the uncertainty facing the economy, does it take 300 basis points for the actual policy rate to fall?"
U.S. data released last Friday showed that the Federal Reserve's favorite inflation indicator, the personal consumption expenditures (PCE) price index, rose 0.2% month-on-month last month as expected. The data seems to support a smaller interest rate cut.
According to data from CME's "FedWatch" tool, the market currently believes that the probability of the Federal Reserve cutting interest rates by 25 basis points at this month's meeting is close to 70%, and the probability of a 50 basis point cut is about 30%.
Wall Street believes that this week's non-farm data may be a decisive factor in the extent of the Federal Reserve's interest rate cut in September.
Analysts at Citigroup expect nonfarm payrolls to increase slightly by 125,000 in August, a slight increase from 114,000 in July, and the unemployment rate is expected to stabilize at 4.3%, or possibly fall to 4.2%.
Citi believes that if the employment report meets the bank's expectations of 125,000 jobs and an unemployment rate of 4.3%, the Fed will cut interest rates by 50 basis points at its upcoming September meeting. The rationale for the rate cut is that there are downside risks in the labor market, especially if job growth is below 175,000 and the unemployment rate remains high.
Analysts pointed out that Fed Chairman Powell laid the foundation for a September rate cut at the Jackson Hole conference, while being open to a larger rate cut. They believe that a 50 basis point rate cut in September could be the beginning of a series of rate cuts by the Fed, and subsequent interest rate decisions may rely on economic data, especially labor market data.
Article forwarded from: Jinshi Data