Non-farm "big test" is coming tonight! Economists pour cold water: It is unlikely that the Fed will cut interest rates by 50 basis points
Economist Carl Weinberg stated that the likelihood of the Federal Reserve making a panic rate cut of 50 basis points is low, and he believes that a rate cut of 25 basis points would be more appropriate. Despite mixed signals in the labor market data, with private sector employment growth slowing to the lowest level since 2021, initial jobless claims have decreased. Weinberg believes that a 50 basis point rate cut would require more significant layoffs and employment data. He pointed out that real interest rates are rising, inflation is falling, and the Federal Reserve does not need to panic, as the interest rate remains between 5.25% and 5.50%. According to the CME FedWatch tool, the probability of a 50 basis point rate cut is 40%, while the probability of a 25 basis point rate cut is 60%
According to the financial news app Zhitong Finance, Carl Weinberg, Chief Economist of High Frequency Economics, stated that the possibility of the Federal Reserve making a panic rate cut of 50 basis points is unlikely as investors await the Fed's interest rate decision this month.
It is widely expected that the Fed will begin cutting rates at the meeting on September 17th to 18th, marking a shift from the tightening policy post-pandemic. The tightening policy has raised concerns about a potential economic recession in the United States.
Weinberg said, "Based on the data, we have not seen any signs that would trigger a panic rate cut of 50 basis points by the Federal Reserve." He added that the U.S. economy would welcome a 25 basis point rate cut.
He acknowledged that while hiring has slowed down, there has been a decrease in initial jobless claims recently.
The U.S. employment market data released on Thursday sent mixed economic signals, with the market worrying about the Fed maintaining high interest rates for too long.
The growth rate of private sector employment has dropped to the lowest level since 2021, raising concerns about a sharp slowdown in the labor market. On the other hand, initial jobless claims have decreased compared to the previous week.
"I believe that for the Federal Reserve to cut rates by 50 basis points, the conditions required are a significant increase in initial jobless claims, evidence of more layoffs in the economy, and a sharp decline in hiring, possibly even to zero," Weinberg said.
He noted that real interest rates have risen while inflation has fallen. Weinberg stated, "The Fed must take action on this, but there is no need to panic and cut rates by 50 basis points."
The Fed's benchmark borrowing rate is currently between 5.25% and 5.50%.
25 or 50 Basis Points Rate Cut in September?
Other market observers insist that a 50 basis points rate cut is not entirely impossible, especially as Wall Street prepares for the release of the U.S. August employment report later today. This report is one of the most important economic data points this year.
According to the CME FedWatch tool, traders currently estimate a 40% probability of a 50 basis points rate cut by the Fed in September, with a 60% probability of a 25 basis points rate cut.
Ben Emons, Founder of Fed Watch Advisors, said, "A looser, weaker job market allows the Fed to remove constraints on policy rates, and the rate cut could be as high as 50 basis points." He added that the momentum of employment data is "weakening."
Data from Dow Jones shows that non-farm payrolls in August are expected to increase by 161,000, with the unemployment rate expected to drop to 4.2%. However, recent data indicates a significant slowdown in hiring, posing some downside risks to this forecast.
Emons mentioned that despite the possibility of positive growth in non-farm payrolls, there could still be a "low point" below 100,000.
In his report on Friday, he stated, "Weak data (<100,000) is unfavorable for risk sentiment, as the market will reflect a weakening labor market rather than a relaxing one, meaning economic growth fears will turn into economic recession fears." Emons said, "Assuming (subsequent) data triggers a downward trend in the job market. In this case, the Fed will react more quickly, which may ultimately solidify the next major bottom of the S&P 500 index, near or slightly below the 200-day moving average."