One economist recently said that the US economy faces a significant recession risk, leading the Fed to cut interest rates in July.

While the market expects the path to cutting interest rates will be longer, the Fed may make the first rate cut in July when the risk of economic recession becomes clearer.

Steven Blitz, economist at GlobalData TS Lombard, noted in a June 19 report that there is a 60% chance that Fed Chairman Jerome Powell could surprise the market with an interest rate cut next month. According to the CME FedWatch Tool, the market currently predicts there is only a 10% chance the Fed will cut interest rates at its July meeting, with most expecting the first rate cut in November.

Blitz stated that the interest rate cut would be aimed at staving off a recession, as recent data suggests the economy is weakening. As Powell reiterated that the Fed's decisions depend on data, an early rate cut is possible.

Blitz commented, “Recent economic data suggests that if June nonfarm payrolls mirror April and overall June data remains weak, the FOMC will adopt a more dovish stance in January. 7”. In April, the US economy added 175,000 jobs, missing analysts' expectations. While May data improved, a rise in unemployment claims cast a shadow over the labor market. Housing data also showed a significant slowdown in construction activity.

Blitz noted, “The pace of new home construction slowed in May, especially for single-family homes. Inventory levels rise and transactions fall, signaling a recession. Weak construction sentiment further dampens expectations for new home construction in the second half of the year.”

These risks are becoming clearer, especially after hawkish Fed officials like Neel Kashkari suggested that a rate cut might not happen until December.

Blitz concluded: “The FOMC should not announce a rate cut in advance. Economic data will determine when cuts are needed.” With recent data showing cracks in the housing and labor markets, a rate cut could come sooner than expected. Blitz added: "There is a possibility that the Fed will ease policy in July. A recession is inevitable."

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