Fed faces pressure to cut rates

by / ⠀News / August 8, 2024
Fed pressure

The Federal Reserve finds itself in a precarious position as markets anticipate sizable interest rate cuts to head off a potential recession. Traders are pricing in a half-point cut in September, followed by aggressive easing that could lower the Fed’s short-term borrowing rate by 2.25 percentage points by the end of next year. Steve Blitz, chief U.S. economist at TS Lombard, stated, “No recession today, but one is increasingly inevitable by year-end if the Fed fails to act.” He believes the process would likely begin with a half-point cut in September, telegraphed in late August.

Citigroup economist Andrew Hollenhorst noted, “The unfortunate reality is that a range of data confirm what the rise in the unemployment rate is now prominently signaling — the US economy is at best at risk of falling into a recession and at worst already has.” He expects data in the coming month to confirm a continued slowdown, making a half-point cut in September likely. Despite the market still creating jobs and stock market averages near record highs, an emergency cut between now and the Sept. 17-18 open market committee seems unlikely.

However, Bank of America economist Michael Gapen states, “If the question is, ‘should the Fed consider an intermeeting cut now?’, we think history says, ‘no, not even close.’

The Fed is expected to cut rates almost as swiftly as it raised them from March 2022 to July 2023.

See also  IBM Retirement Plan Sparks Buzz

Fed faces recession fears

This process could start later this month when Fed Chair Powell delivers a keynote policy speech during the Fed’s annual retreat in Jackson Hole, Wyoming.

Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities, expects the Fed to cut rates by 3 full percentage points by the end of 2025, more aggressively than the current market outlook. He asserted, “Go big or go home. The Fed has clearly said that rates are too high.

Why would they be slow at removing the tightness?”

Goldman Sachs recently raised its recession forecast to 25% from 15%, citing that the Fed has substantial room to cut rates if necessary. However, any quakes in the data, such as a downside surprise to nonfarm payroll numbers, could quickly reignite recession fears. Economist and strategist David Rosenberg, founder of Rosenberg Research, wrote, “The Fed is as behind the economic curve now as it was behind the inflation curve back in 2021-2022.” He added that the heightened expectation for rate cuts “smacks of a true recession scenario because the Fed has rarely done this absent an official economic downturn.”

As the markets continue to closely watch the Fed’s next moves, it is clear that the potential for recession hinges significantly on the Federal Reserve’s ability to act decisively and timely.

About The Author

April Isaacs

April Isaacs is a staff writer and editor with over 10 years of experience. Bachelor's degree in Journalism. Minor in Business Administration Former contributor to various tech and startup-focused publications. Creator of the popular "Startup Spotlight" series, featuring promising new ventures.

x

Get Funded Faster!

Proven Pitch Deck

Signup for our newsletter to get access to our proven pitch deck template.