Amid fresh concerns of a looming recession in the US triggered by weaker-than-expected July payroll data, expectations have soared that the US Fed could potentially propose a significant rate cut in its next policy meeting in September.
July payroll data last Friday showed the US unemployment rate jumped to near a three-year high of 4.3 per cent against 4.1 per cent in June. July marked the fourth consecutive monthly increase in the unemployment rate.
Fed Chairman Jerome Powell gave clear hints after the July FOMC meeting that rate cuts were possible as early as September when the next Fed meeting is due.
While the market is pricing in a rate cut in September, speculation is growing about whether the US central bank will propose a substantial 50 bps cut or just a 25 bps cut.
Is a deeper cut coming in September?
There seems to be a divide among experts on the expectations of rate cuts in the US. While some believe the Fed may feel forced to cut rates in September, and there may be an overall 100 bps rate cut in September, November and December, some experts expect the Fed to await more data to be sure growth has taken a significant hit.
“Rising downside growth risks in the US in recent weeks have been accompanied by moderating labour market pressures. All of this has suddenly changed the narrative of Goldilocks. Although the FOMC guided toward a gradual policy easing at last week’s meeting, these developments likely interact with shifting the Fed’s perception of risk decisively toward labour market weakness and could open a case for a more forceful rate cut ahead,” said Madhavi Arora, Lead Economist at Emkay Global Financial Services.
On the other hand, Anitha Rangan, the economist at Equirus, pointed out the situation prevailing in March last year when Silicon Valley Bank’s collapse triggered the risk of larger financial problems not just for the US but globally, but the Fed held on to its nerve and continued hiking rates.
“This was in complete contrast to market expectations. Then, the narrative of the recession was running very high—an inverted yield curve, bank collapse, and geopolitical fallouts were perfect reasons not to hike—even if the cut was premature,” Rangan observed.
Rangan pointed out that the bank collapse was managed through other channels, inflation has tempered, and the labour market appears well balanced, and it could still be early to assume that pain points have intensified.
“Unemployment may be rising, but a supply led by immigrants may be causing the rise in the participation rate and thus unemployment. Growth defined by GDP is still intact. So, while the Fed has communicated that the time for accommodation is close, there is no confirmation yet,” said Rangan.
The real gross domestic product (GDP) of the US increased at a rate of 2.8 per cent for the April to June quarter of the financial year 2024-25, according to data released by the US Bureau of Economic Analysis.
Rangan suspects the recession narrative, gaining prominence just a week after Fed policy, is market-driven rather than due to fundamental factors.
“The reversal of Yen carry trade led by the BoJ hike has triggered a sell-off, driving markets to believe in the recession narrative. Note that payroll is still in job additions and not in negative. So, fear of recession and calling for aggressive rate cuts is misplaced,” said Rangan.
“An aggressive rate cut will strengthen the Yen and only amplify the problem rather than reverse it. Perhaps the Fed now has a new challenge from the BoJ to handle when it hikes. The better course for the Fed is to stay put if fundamentals are supportive. Each central bank cannot be the theme. For once, the Fed may look at other central bank actions and impacts more closely rather than the reverse construed for so long,” Rangan said.
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