The US Federal Reserve (Fed) is expected to cut interest rates by just 0.25 percentage points at its upcoming meeting in September, according to a majority of economists surveyed.
Nearly 80% of them believe the Fed will accept a modest cut, bringing interest rates to 5-5.25%.
Only a few think there will be a larger cut and the possibility of an unexpected interest rate adjustment is very low, only about 10%.
Fed policymakers are now less inclined to act aggressively after a disappointing July jobs report showed hiring slowing and unemployment hitting its highest level in nearly three years.
Still, Fed leaders, led by Jerome Powell, have stuck to their guns. They're focused on two things: keeping employment high and bringing inflation down to the 2% target.
The Federal Reserve is in no hurry.
Some big names on Wall Street, like JPMorgan Chase and Citigroup, are now calling for a half-point rate cut next month after the latest jobs data was released.
Futures traders seem to agree, pricing in a total of 100 basis points of reduction by year-end. They think the Fed could start with a 50 basis point cut in September.
But economists don’t believe that. They think the Fed will play it safe with smaller, quarter-point cuts not just in September, but in November, December and even as early as 2025.
The big question now is: what's happening to inflation? It's likely that US inflation picked up slightly in July, but not enough to worry the Fed.
The consumer price index (CPI) is expected to have risen 0.2% from June. This small increase would still keep the annual inflation rate at its slowest since early 2021.
Jobs report puts pressure on rate cut decision
Falling inflation has given Fed officials some breathing room to consider cutting interest rates without losing focus on the labor market.
But don’t get too excited – hiring is slowing and unemployment continues to rise. The July jobs report showed that US employers are holding back on hiring.
This has raised alarm bells, as a recession could be on the horizon. If the CPI figures are as expected, it will confirm that inflation is still on track – falling.
Economists say there may be a slight uptick after June's unexpectedly low reading, but nothing to worry about. That could be due to rising costs in core services, excluding housing, which the Federal Reserve is particularly concerned about.
There is also a possibility that commodity prices will increase, thanks to higher shipping costs.
Even with all the recent events in the markets and economy, most economists (69%) think the US will likely avoid a recession. They are betting on a “soft landing,” where the economy slows but doesn’t collapse.
About 10% of those surveyed think a soft landing is possible, but only if the Fed acts quickly and aggressively. Twenty-two percent of those surveyed believe a recession is inevitable.
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