Federal Reserve cuts interest rates by 25 or 50 basis points in September? Wall Street is divided

According to the latest data released by the United States on Thursday, the labor market showed further signs of cooling, coupled with weak manufacturing data earlier this week, which has increased market concerns about the US economy slipping into a recession. In this context, the market has increased bets on a 50 basis point rate cut by the Federal Reserve in September, a expectation also supported by Morgan Stanley.

Michael Feroli, Chief US Economist at Morgan Stanley, stated that the Federal Reserve should cut rates by 50 basis points at the September meeting.

Feroli said in an interview on Thursday, "We believe they should get back to neutral as soon as possible." He added that the high point of the neutral policy set by the Federal Reserve is around 4%, 150 basis points lower than the current level. "We believe there are good reasons to accelerate the pace of rate cuts."

According to the CME FedWatch tool, traders currently expect a 40% probability that the Federal Reserve will lower the federal funds rate target range from the current 5.25-5.50% to 4.75-5%, and a 60% probability of a 25 basis point cut to the 5-5.25% range.

Feroli also stated, "If you wait until the inflation rate has returned to 2%, you may have waited too long. While the inflation rate is still slightly above target, the unemployment rate may be slightly higher than they believe is consistent with full employment. Now, there are risks to both employment and inflation, and if it turns out that one of these risks is materializing, you can always reverse course."

At the time of this economist's remarks, the latest ADP data showed that August was the weakest month for private sector employment growth in the United States since January 2021. Prior to this, the slight increase in the unemployment rate to 4.3% in July triggered an economic recession indicator known as the "Sam Rule."

Nevertheless, Feroli stated that he does not believe the economy is "falling apart." The economist continued, "If the economy collapses, I think you would have reason to cut rates by more than 50 basis points at the next FOMC meeting."

Citigroup also supports a 50 basis point rate cut.

Citigroup analysis pointed out that the labor market is not only weaker than before the pandemic, but also continues to cool, with the cooling rate possibly accelerating. If Friday's non-farm payroll report confirms that the labor market is deteriorating, it is expected that the Federal Reserve will cut rates by 50 basis points in September and another 50 basis points in November.

Error Message

However, other analysts hold the opposite view, believing that the Federal Reserve should not cut rates by 50 basis points, as it would send a wrong message about an imminent economic recession.

David Sekera, Chief US Market Strategist at Morningstar, stated in a report that a 50 basis point rate cut "would send the wrong signal to the market - indicating that the Federal Reserve is more concerned about a recession than inflation." In this case, the stock market may further decline Forvis Mazars Chief Economist George Lagarias stated in an interview that while no one can guarantee the extent of the rate cut by the Federal Reserve at the upcoming meeting, he "firmly" supports a 25 basis point cut.

"I don't see the urgency for a 50 basis point cut," Lagarias said. "A 50 basis point cut may send the wrong message to the market and the economy. It could signal an urgency, you know, it could be a self-fulfilling prophecy."

"So, it would be very risky if they do it without a specific reason. Unless something unsettling happens in the market, there is no reason to panic."

Despite the latest data intensifying concerns about the U.S. economy, Lagarias believes that the U.S. economy is "far from a recession." He stated, "The economy is slowing down, that's for sure, but I think we are far from a recession. I know the job market has softened, but some of it is due to an increase in supply rather than a decrease in demand. Everyone also expected this slowdown. But there is no evidence of an economic recession, at this point, I don't think the Fed will take very aggressive action."

Jefferies' Chief Financial Economist in Europe, Mohit Kumar, also warned the Federal Reserve against a 50 basis point rate cut this month. The economist stated in an interview on August 13 that there is "absolutely no need" for the Fed to cut rates by 50 basis points at the September meeting.

The Federal Reserve will make a decision on the direction of interest rates on September 17th and 18th