Powell, the market and Wall Street banks deny the new reality of giant cuts for the new rate cycle of the Federal Reserve. The 50 basis point cut recorded yesterday by the Fed was not the base scenario of analysts either, even if they admitted a high degree of uncertainty. Only JP Morgan, among the big investment banks, dared to anticipate the move and, now, does not rule out that it will happen again on November 7.
Fed Chairman Jerome Powell made it clear to the media that 50 basis point cuts would not be the new normal for the central bank. Yesterday, the giant cut was imposed, almost against all odds. Markets had been calling for a double easing for months, but few pundits expected the Fed to go this far. It is not usual for the Federal Reserve to start the cycle of budget cuts with gunshots, although this move is not so unusual in times of crisis.
The only major Wall Street investment bank to anticipate yesterday’s big drop was JP Morgan.. Even Citi jumped ship at the last minute, which was another flag bearer of a jumbo movement. 50 points in one go is an aggressive move, even though the market has been anticipating it for weeks.
Powell knows this, which is why he has repeatedly stressed that a 50 basis point interest rate cut is not a “predetermined path.” The problem is that this did not justify the sharp decline due to a serious economic deterioration.The banker said the U.S. economy was strong, ruling out any hint of a recession. “I don’t see anything in the economy that suggests that a freeze in the economy is high,” he said at a news conference, citing solid GDP growth, a steady decline in inflation and a healthy labor market.
Employment will guide rates
However, JP Morgan is back on track and does not rule out repeating a jumbo cut for the next meeting. Michael Feroli is the firm’s chief economist for the United States and has been considering a 50 basis point cut since August. It will depend on the deterioration of employment..
“We still expect rates to normalize more quickly after today’s cut.“, Feroli in a note to clients analyzing the Fed meeting. “Our expectation of a 50 basis point cut at the next meeting in early November depends on further deterioration in both employment reports between now and then,” he explains.
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The labor market has become the latest signal to the Fed to activate the cycle of budget cuts. Their resistance was the missing piece to enter the Fed’s puzzle and abandon the overheating phase of the economy. Although Powell acknowledged that the unemployment rate of 4.2% is high compared to last year.
Feroli acknowledges the degree of exception that a further 50 basis point reduction represents and adds that “More benign labor data would seal the case for the 25 basis point golden locks scenario. relaxation by meeting during the rest of the year.
Close decision
Goldman Sachs economists led by Jan Hatzius, meanwhile, now expect a longer run of consecutive quarter-point cuts from November to June 2025. However, the choice between a quarter-point cut and a half-point cut in November is “a tight decision,” they comment, adding that the deciding factor will be the next two employment reports, which will coincide with those of JP Morgan.
The market is currently only asking for a 25 basis point cut, which would bring the rate range from 4.75%-5% to 4.5%-4.75%.. The FedWatch tool, which tracks the probabilities of cuts following financial swaps, gives a rate of 61% for a single cut. But for December, the outlook changes to a double cut. The most likely scenario is a massive cut to leave rates between 4 and 4.25%.
“Money markets are unlikely to price in a faster pace of tapering or a lower final rate until we see the September jobs report,” JP Morgan noted.
