Fed Expected to Cut Rates by 25 Basis Points at Upcoming Meetings

The Federal Reserve is anticipated to reduce interest rates by 25 basis points in each of its next five meetings following a weaker-than-expected jobs report for August, as predicted by analysts at Bank of America.

Investors are nearly certain that the Fed will lower borrowing costs from a 23-year high of 5.25% to 5.5% after the data revealed that the U.S. economy created 142,000 jobs last month, a significant increase from the downwardly revised figure of 89,000 in July. Economists had anticipated a reading of 164,000, which is higher than the initial July figure of 114,000.

Additionally, the recent report indicated that the U.S. unemployment rate fell to 4.2%, down from 4.3% in July, aligning with expectations.

In their commentary following the data release, the Bank of America analysts emphasized that the findings have heightened the urgency for the Fed to return rates to a level they consider “neutral.” This term refers to a theoretical rate where borrowing costs support employment while maintaining stability in inflation. Currently, rates are at a 23-year peak following a series of increases by the central bank to address surging price growth.

Some Fed officials, including Chair Jerome Powell, have expressed concerns that these elevated rates could negatively impact job demand.

On the same day, Fed Governor Christopher Waller stated that the time has come for the Fed to begin lowering rates. However, he added that the timing and speed of these cuts would depend on future economic data, noting that more aggressive action would be taken if subsequent reports show a significant decline in the labor market.

The analysts from Bank of America interpreted Waller’s remarks as indicating that various options are being considered, but they believe a 25-basis point cut is sufficient for September. They suggested that a larger reduction of 50 basis points could be interpreted by the markets as a sign that the Fed is lagging in its support for employment and needs to adopt a more accommodative approach.

They projected that the Fed will implement 25 basis point cuts in each of its five meetings up to March 2025, after which they foresee a slower pace of reductions at 25 basis points per quarter.

The analysts mentioned that due to the uncertainty surrounding the concept of ‘neutral,’ they expect the Fed to enter a fine-tuning phase once rates reach 4%.

As for market expectations, traders believe there is a 73% chance that the Fed will lower rates by 25 basis points later this month. Meanwhile, the likelihood of a 50-basis point cut was estimated at 27%, having briefly exceeded 50% immediately following the jobs report.