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.

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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.'