An economist recently pointed out that the US economy is facing many recession risks and it is likely that the Fed will lower interest rates in July.
The market still believes that the Fed's interest rate reduction is a long shot. However, the US Central Bank may make its first cut in July, when recession risks begin to appear more clearly in the economy.
Steven Blitz, economist at GlobalData TS Lombard, said in a report published on June 19, there is a 60% chance that Fed Chairman Jerome Powell will surprise the market and lower interest rates next month.
According to CME FedWatch Tool, the market is currently only predicting a 10% interest rate cut at the July meeting. Most investors expect the first cut will take place in November.
However, Blitz said, the Fed's interest rate cuts will be aimed at preventing a recession from occurring as recent data shows the economy showing signs of weakness.
Furthermore, as Chairman Powell reiterated his stance that the Fed will depend on data to make interest rate decisions, an early cut is not out of the question.
âRecent economic data suggests that if June nonfarm payrolls are similar to April and the overall June numbers are similar, the FOMC will take a more dovish stance in its announcement,â Blitz said. July."
In April, the US economy added 175,000 jobs, much lower than analysts' expectations. Meanwhile, May's data improved, but the number of applications for unemployment benefits "cast a shadow" on the labor market.
Furthermore, housing data also showed a sharp slowdown in construction activity.
âThe slowdown in new home construction in May, especially for single-family homes, is not just happening this month,â Blitz said. Inventories are up and transactions are down at recession levels.â
Weak sentiment among builders is also dampening expectations for home construction activity. Blitz pointed out that the increased supply of homes for sale coupled with weak market sentiment is a sign that new home construction activity will stagnate in the second half of the year.
Accordingly, this will be something that worries the Fed as it has maintained a tightening of financial conditions for a long time and caused a recession.
That risk is increasingly evident after some hawkish Fed officials such as Neel Kashkari recently said it may take until December for the Fed to lower interest rates.
Blitz commented: âFOMC members should not announce when the Fed will start lowering interest rates. Economic data will tell us when to cut back.â
And with recent data showing cracks forming in the housing and labor markets, that means a rate cut could happen sooner than most expect.
With recent economic data showing cracks forming in the housing and labor markets, interest rate cuts could come sooner than most markets expect. âThe Fed will most likely ease in July,â Blitz said. âA recession is inevitable.â
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