Cut rates by 50 basis points or 100 basis points before the end of the year? JPMorgan Chase: Powell's "preference for direction" begins to shift

FX168 Financial News (Asia Pacific) News JPMorgan Chase stated this week that it is expected that the Federal Reserve will cut interest rates by 100 basis points before the end of the year, a full 1 percentage point. The bank pointed out that the Federal Reserve has shifted from a gradualist attitude to concerns about cutting rates too late. Federal Reserve Chairman Powell's speech at Jackson Hole has convinced many that a rate cut is imminent, with the current rate at 5.25%, the highest level in over 20 years.

Fortune reported that economic data and hints from members of the Federal Open Market Committee (FOMC), including Powell himself, have led analysts to start questioning whether the rate cut will be larger than previously expected. Some believe that Powell's "risk appetite" is changing.

(Source: Fortune)

Previously, institutions such as Bank of America (BofA) and Vanguard had predicted a 25 basis point rate cut in September, but calls for a 50 basis point cut are now gaining momentum.

JPMorgan Chase stated this week that it is expected that the Federal Reserve will cut interest rates by 100 basis points before the end of the year, a full 1 percentage point.

With only 3 meetings left, this means that at least one rate cut must be 50 basis points, with two additional cuts of 25 basis points each.

Amid expectations of a shift, the volatile data continues to make the dual mandate of the FOMC more difficult to interpret. This dual mandate is to reduce inflation (which has been relatively successful so far without causing an economic downturn) and maximize employment.

A report released by the US Bureau of Labor Statistics this week shows that the unemployment rate in metropolitan areas is rising, while demand for workers is weakening.

Earlier this month, the US Bureau of Labor Statistics stated that, conversely, productivity is increasing.

In a report this week, JPMorgan Chase wrote that this has created a "strange combination," with concerns about the US entering a recession intensifying while financial markets are becoming more optimistic about the future performance of the business sector.

The bank added that the Federal Reserve is shifting from a gradualist attitude to concerns about cutting rates too late.

Federal Reserve Chairman Austin Goolsbee expressed this concern earlier this month in an exclusive interview with Fortune magazine. He warned, "When we set rates at this level, the situation is very different. Every month, when we encounter inflation rates like we just saw, inflation rates lower than expected, we are effectively tightening rates." Therefore, he asked himself and other Federal Open Market Committee members, "When does the Fed really need such a tight policy?"

"The answer is, only when necessary, and when you are worried that the economy is about to overheat, will you adopt a tightening policy," he explained. "In my view, this is not a typical sign of an overheated economy. Therefore, I do believe we need to be aware that this tense situation will not last too long, because if we do so, we will have to consider the practical aspects of the mission, and the employment situation will worsen."

Regardless of whether experts expect a 25 basis point rate cut, a 50 basis point rate cut, or even an emergency rate cut, one thing they all agree on is that the FOMC is changing its strategy.

Powell said last week at Jackson Hole, "Now is the time for policy adjustments, the policy direction is clear, and the timing and pace of rate cuts will depend on subsequent data, changes in outlook, and risk balance."

Jeremy Siegel, a professor at the Wharton School of Business, wrote in his weekly commentary for investment expert WisdomTree that this indicates Powell and his colleagues are seeking to balance both sides of their responsibilities.

Siegel wrote in his Monday commentary, "Although Powell commented that part of the reason for the rise in the unemployment rate is the increase in labor supply, he also emphasized that the labor market is clearly weak, and further weakness is unwelcome."

He agrees with lowering the benchmark interest rate "immediately to 4% or lower." "In other words, (Powell) will not try to use a higher unemployment rate to achieve the task of raising the inflation rate to 2%, which is a very important shift," Siegel wrote.

While JPMorgan Chase may not agree with Siegel's call for an immediate rate cut, analysts at the largest bank in the United States also noted the change in Powell's so-called "risk appetite."

They wrote, "Powell's speech at Jackson Hole last week confirmed that this change in risk appetite has occurred, and the Fed does not want to see labor conditions deteriorate further."

"We believe this will lead the Fed to achieve a rate cut of about 100 basis points by the end of this year."

Some analysts believe that if the Fed does not cut rates this year, Powell will not only face market resistance, but may also lead to an economic recession.