Fed Expected to Reduce Interest Rates by 125 Basis Points Throughout 2024

The Federal Reserve may respond to the recent nonfarm payroll figures by implementing 125 basis points in cuts during its three remaining monetary policy meetings this year, according to analysts from Citi.

In a note issued to clients, the analysts expressed that they would “not be surprised” if the Fed decreased rates by 25 basis points at its upcoming two-day meeting on September 17-18, followed by two cuts of 50 basis points each in November and December.

They stated, “In either case, we expect 125 basis points of cuts over the remainder of the year, slightly more than the approximately 110 basis points currently priced in.”

These comments come as investors are increasingly confident that the Fed will reduce borrowing costs from a 23-year high of 5.25% to 5.5% following a disappointing jobs report released on Friday. The report indicated that the U.S. economy added 142,000 jobs in the previous month, a significant rise from the heavily revised figure of 89,000 in July. Economists had expected an increase of 164,000 jobs.

The report also revealed that the U.S. unemployment rate stood at 4.2%, compared to 4.3% in July, which was in line with forecasts.

Additional data released prior to the Labor Department’s report showed that U.S. private employers added the fewest jobs since 2021 in August, while job openings fell to their lowest level in three and a half years in July.

Citi analysts argued, “Job growth has slowed to rates typically seen only during recessions and suggests that the unemployment rate will continue to rise—and likely accelerate higher.”

Investor expectations for a 25-basis point rate cut by the Fed were at 73% on Monday morning, based on data from the CME Group’s FedWatch Tool. Meanwhile, the likelihood of a 50-basis point cut was at 27%, after briefly surpassing 50% immediately following the jobs report.

On Friday, Fed Governor Christopher Waller remarked that “the time has come” for the Fed to lower rates, but he indicated that he remained open to the potential scale and pace of those cuts.