Economists remain cautious amid divergent projections on Fed rate cuts

A large majority of economists surveyed believe that interest rates will come down by only a quarter point in September, at odds with some calls by large Wall Street banks for a jumbo cut at the next meeting.

Almost four-fifths of economists surveyed by Bloomberg expect the Fed to lower rates to 5-5.25 per cent at its Sept. 17-18 meeting, while most of the remaining respondents see a bigger cut. The median projection calls for only a 10 per cent chance of an extraordinary move to shift rates before the meeting.

However, Fed policymakers have pushed back on the need for aggressive actions following a weaker-than-expected jobs report in July, when hiring slowed markedly, and the unemployment rate rose to its highest level in nearly three years.

Fed Chair Jerome Powell and other Fed leaders have said they are putting increased weight on their full employment mandate while striving to reduce inflation to their 2 per cent target.

On the other hand, some key Wall Street banks, like JPMorgan Chase & Co. and Citigroup Inc., revised their calls in the wake of last week's jobs report to call for a half-point move next month. In response, futures investors priced in a 100-basis-point reduction by year-end, starting with a 50-basis-point cut next month.

Yet, the consensus among economists had been that the Fed would approve a more modest quarter-point move at meetings in September, November and December and the first quarter of 2025. The 51 economists were polled August 6-8 in the wake of a global market selloff.

Calls for a jumbo-sized cut 'are overdone and a knee-jerk reaction,' said Ryan Sweet, chief US economist at Oxford Economics. 'Historically, the Federal Open Market Committee has delivered intermeeting cuts and cuts larger than 25bps when there was a clear negative economic shock or when the data were worse than they have been so far.'