Non-farm payrolls will play a key role, the Federal Reserve may cut interest rates by another 50 basis points!

Investors, after the Federal Reserve's first rate cut in four years, are now turning their attention to a series of economic data in the coming weeks. Stephanie Roth, Chief Economist at Wolf Research, discussed the current economic situation and the Fed's path forward in seeking a soft landing in a recent program.

Roth described the Fed's 50 basis point rate cut as "precautionary" to some extent, noting that there is still significant room for further rate cuts by the Fed. She stated, "Fed officials had a lot of room to cut rates from the beginning. And Powell did not fully acknowledge this, he was a bit vague on the issue, but when asked if they were just making up for the rate cut that might have happened in July. He didn't explicitly say that was the case, but I think from his body language, he did not imply they should have cut rates in July. They didn't do that, and now they have made a 50 basis point rate cut."

She believes that the Fed's next rate cut will depend on the labor market and inflation status. Roth pointed out that the core personal consumption expenditures (PCE) growth rate over three and six months is below 2%. Wage inflation remains high, while job growth is slowing down. "At this point, a greater degree of weakness in the labor market poses a more significant risk to the economy than inflation."

"We are in an environment with slightly higher inflation, and we can get through this. But if we start to see the labor market really collapse, that could be a risk of recession. The Fed hopes to avoid this scenario."

Therefore, she pointed out that the upcoming non-farm payroll data will be particularly important for the Fed's decision on the magnitude of the next rate cut. "Our base expectation is that the employment numbers will be slightly better than the market expects," she explained, expecting an addition of jobs between 120,000 and 130,000. If the data falls below this threshold, she believes the Fed may cut rates by another 50 basis points. Similarly, if the unemployment rate rises to 4.3%, the Fed may opt for a larger rate cut.

While the Fed expects the terminal rate at the end of its rate cut cycle to be 2.8%, Roth stated, "Our base expectation is that they will cut to at least 3%, possibly even by the end of 2025." She concluded, "They may accelerate this rate cut cycle now, and we may soon see 3%. Then there may be several more rate cuts after that."