Citi: If the job market continues to slump, the Fed may cut rates by 125 basis points by the end of the year
Citigroup economist Sojin stated that if the US employment market continues to deteriorate, the Federal Reserve may cut interest rates by 125 basis points before the end of the year. It is expected that the Federal Reserve will start with a 50 basis point cut, followed by another 50 basis point cut, and finally a 25 basis point cut in December. The rising unemployment rate is concerning and may prompt the Federal Reserve to adopt a more aggressive rate-cutting policy. The market has high expectations for a 25 basis point rate cut in September, but the likelihood of a 50 basis point cut is lower. Federal Reserve Chairman Powell has indicated the direction of policy adjustments, with future actions depending on employment data and economic changes
According to the financial news app Zhitong Finance, Citigroup's senior economist Robert Sockin said that in the case of weak employment, the Fed's rate cut may exceed the market's current expectations. Sockin stated that Citigroup expects the Fed to cut rates by 125 basis points by the end of this year.
He said, "Our U.S. team believes that the Fed will start with a 50 basis point cut, followed by another 50 basis points. Therefore, they can actually get a 125 basis point cut this year." He hinted that the Fed may cut rates by another 25 basis points at the December meeting.
Sockin said that the bank's forecast is based on the continuously changing labor market conditions and the rising unemployment rate. "The extent of the rise in the unemployment rate is still worrying. Therefore, from a risk management perspective, this may lead the Fed to be more aggressive in its initial actions, especially if they believe that the risk of a significant economic slowdown is high."
In July, the U.S. unemployment rate unexpectedly rose from 4.1% in June to 4.3%. While the number of initial jobless claims has decreased in recent weeks, the decline has been modest. According to the U.S. Department of Labor data, the number of initial jobless claims dropped to 231,000 last week, below the year-high of 250,000 at the end of July.
Sockin stated that if the unemployment data continues to weaken, the Fed's rate cuts will be particularly aggressive. Referring to the Fed, he said, "We will wait for the results of the next employment report. I think if the unemployment rate starts to rise from now, they will find it difficult not to take more aggressive action."
According to the CME FedWatch tool, investors expect a 25 basis point rate cut in September, with a lower probability of a 50 basis point cut. At last week's Fed Jackson Hole meeting, Fed Chairman Jerome Powell stated that the Fed is prepared to cut rates in September.
He said, "Now is the time for policy adjustments," "The direction forward is clear, and the timing and pace of rate cuts will depend on the upcoming data, evolving outlook, and risk balance."
He mentioned that while the Fed is seeking accommodative monetary policy, it will continue to focus on its dual mandate - a 2% inflation target and stimulating employment