The suspense of the Fed rate cut will be revealed next week! All eyes are on the dot plot of interest rates and the expected unemployment rate

According to a survey of economists, the Federal Reserve is likely to cut interest rates by 25 basis points at the next meeting and the following two meetings. While the market generally expects the Fed to cut rates at the September 17-18 meeting, most of the 46 economists surveyed believe that policymakers will adopt a more gradual rate cut strategy, rather than the full percentage point cut expected by traders before the end of the year.

The latest economic survey data shows that only a few economists expect the Fed to further cut rates by 50 basis points at the November or December meetings. However, respondents generally believe that compared to forecasts in June, the Fed will take a more aggressive rate cut path in the coming years. According to economists' expectations, the median forecast of the Fed's upcoming dot plot may show that by the end of next year, rates could be between 3.5% and 3.75%, and by the end of 2026, they could be between 2.75% and 3%.

Scott Anderson, Chief U.S. Economist at BMO Capital Markets, expects the Fed to cut rates and may hint at a series of further rate cuts at the upcoming meeting to reduce the tightening effect of monetary policy.

Overall, the latest non-farm data and CPI and PPI data have not resolved the significant debate in the market about the extent of the Fed's rate cut in September. Following the release of a series of economic data including non-farm payrolls, the camp advocating for the normalization pace of a 25 basis point rate cut and the camp advocating for a 50 basis point rate cut to boost the U.S. economy have both expanded. Looking at the pricing of interest rate futures and bond markets, the camp of traders agreeing on a 25 basis point rate cut in September is more dominant. The comprehensive information implied by these latest economic data suggests that the suspense of how much the Fed will cut rates in September may not be revealed until the last moment - at the Federal Open Market Committee (FOMC) monetary policy meeting on September 17-18 Eastern Time.

Rising Unemployment Rate, Worsening Labor Market Concerns

With concerns about slowing hiring and rising unemployment, the pace of rate cuts is accelerating. This strengthens the rationale for starting policy normalization now, as inflation has not yet fully declined to the Fed's 2% target. Economists generally expect that the median forecast for the unemployment rate by Fed policymakers for this year will rise from 4% in June to 4.3%, and 80% of economists believe that the risk of unemployment is mainly skewed to the upside.

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Despite growing concerns about the labor market, over three-quarters of respondents believe that the U.S. economy may continue to grow in the next 12 months. Economists expect that the latest quarterly forecasts of Federal Reserve officials will maintain expectations for economic growth, but inflation and core inflation expectations may slightly decrease. Views on inflation risks vary among respondents, with some believing the risks are skewed to the upside and others to the downside.

Federal Reserve Chairman Jerome Powell recently hinted at a rate cut at the September meeting during a conference in Jackson Hole, Wyoming. He emphasized that further weakness in the labor market is "unwelcome."

However, some policymakers are concerned that once rate cuts begin, inflation may reignite, leading them to advocate for a more gradual approach to policy normalization. In recent years, inflation in the real estate market has been a key factor driving up overall price levels, although there are no significant signs of cooling at present. This has raised concerns for some who believe that lowering interest rates may further stimulate economic activity, potentially leading to further price increases.

Debate over the Pace of Fed Rate Cuts: Gradual or Aggressive?

In monetary policy formulation, the term "gradual" is used by some policymakers to describe their expectations for the pace of rate cuts, but this concept is interpreted differently by different individuals. In a recent survey, over half of economists believe that gradual rate cuts mean lowering rates by 25 basis points at each policy meeting, while 27% of respondents believe rate cuts will continue at each meeting. Based on the median forecast of these economists, the central bank may lower rates to 3% in the current rate-cutting cycle.

Although most economists expect next week's policy decision to be unanimous, 16% predict dissenting voices supporting larger rate cuts. Dissent has been rare during Jerome Powell's tenure as Fed chair, and if regional Fed bank presidents voice dissent, it would be the first time since 2022 when the Fed began rapid rate hikes to curb demand. Even rarer, if Fed governors or the chair oppose rate cuts, it would be the first time since 2005.

Economists have differing views on how the Fed will communicate its policy actions next week. While most expect the Fed to take a more dovish stance in its post-meeting statement, focusing more on employment issues, there is disagreement on how policymakers will signal future actions.

Approximately 44% of respondents expect Fed officials to adjust the statement to acknowledge potential policy adjustments in the future; 31% believe they will clearly indicate their intention to continue cutting rates and may provide guidance on the pace of rate cuts. One-fifth of economists believe the Fed will not change its guidance on future policy adjustments.

Gus Faucher, Chief Economist at PNC Financial Services Group, said, "The statement is expected to confirm the slowdown in job growth and the rise in the unemployment rate, while also noting that the labor market overall remains at full employment." He added, "The statement will also emphasize that the Fed does not want to see further weakness in the labor market."