Howard Marks: The Fed will cut rates soon, but rates will not fall below 3%

How many basis points will the Fed cut interest rates by?

On Thursday, September 5th, Howard Marks, co-chairman of Oaktree Capital, stated at a conference in Melbourne that the "emergency situation" to curb inflation has ended, and the Fed is about to start cutting interest rates, but rates will not fall below 3%. He said:

"The Fed will cut rates from the current emergency rates of 5.25% to around 3%. But in my view, we will maintain the rate at 3% and not return to the low points of 0.5% or 1%."

In response to rapid inflation after the pandemic, the Fed raised rates by 25 basis points in March 2022, followed by several larger rate hikes. This year, the Fed has successfully contained inflation, with PCE returning to the 2% range. As U.S. inflation steadily approaches the 2% target this year, risks in the labor market seem to be the only obstacle to the Fed's rate cut.

Currently, the market generally expects the Fed to start a rate-cutting cycle at the mid-September Federal Reserve meeting in Washington, but analysts still have significant differences in opinion on the pace of the rate cuts. Some rate traders expect the Fed to aggressively cut rates by 50 basis points, while others predict a 25 basis point cut.

On Wednesday, September 4th, the "Fed's favorite employment indicator" JOLTS job vacancies fell to 7.673 million, the lowest level since early 2021, significantly below expectations. The market's expectation of a 50 basis point rate cut in September surged to 50% at one point, while the likelihood of a 25 basis point cut dropped from 62% the previous day to 55%.

However, the employment index in the August ISM manufacturing sub-index showed a clear rebound. Analysts suggest that this may indicate that Friday's non-farm payroll report will be stronger than expected.

With various data fluctuations, concerns about a U.S. economic recession are rising, and the market has entered a "bad data is bad news" mode. In a client report, a strategist at Deutsche Bank stated:

"Given that the possibility of the National Bureau of Economic Research declaring an economic recession in the next 3-4 months seems unlikely, a rate cut of over 200 basis points is difficult to justify when calmly examining the data. Economic growth is relatively slow, and only if the market rapidly declines, would there be a reason for a significant rate cut in expectations."