Wall Street Predicts Consecutive 'Big Cuts' by the Fed Starting September Amidst U.S. Employment Shock

Following the release of disappointing U.S. employment statistics for July

Following the release of disappointing U.S. employment statistics for July, major Wall Street financial institutions are predicting that the Federal Reserve (Fed) will implement consecutive significant interest rate cuts, known as 'big cuts,' starting in September. Citigroup, JPMorgan, and Goldman Sachs are among the key financial firms forecasting multiple rate cuts within the year, while the Fed remains cautious. This article examines the economic context, financial institutions' forecasts, and the Fed's response.

Deterioration in U.S. Employment Statistics

On July 2, the U.S. nonfarm payrolls increased by only 114,000 jobs from the previous month, with the unemployment rate rising to 4.3%. This lackluster job growth and unexpected rise in the unemployment rate have sparked concerns that the U.S. economy may be cooling faster than initially anticipated. These employment figures play a crucial role in influencing the Fed's interest rate policy.

Wall Street's Forecast: Anticipation of 'Big Cuts' by the Fed

Citigroup has revised its outlook in light of the poor employment data, predicting that the Fed will lower its benchmark interest rate by a total of 1.25 percentage points by the end of this year. Specifically, Citigroup expects the Fed to implement 50 basis point (bp) cuts in September and November, followed by a 25bp cut in December. By mid-next year, interest rates are projected to be 2.25 percentage points lower than current levels. This forecast represents a shift from Citigroup's previous expectation of three 25bp cuts from September to December.

JPMorgan also anticipates 50bp cuts in September and November, followed by ongoing reductions at subsequent meetings. The firm even suggests that the Fed might take action before its scheduled meeting on September 17-18. However, JPMorgan notes that Fed Chair Jerome Powell may be reluctant to add further uncertainty during an already turbulent summer.

Goldman Sachs Chief Economist Jan Hatzius had initially predicted 25bp cuts in September and December but has updated this forecast to include an additional 25bp cut in November following the latest employment report. Hatzius remains cautious, suggesting that if the August employment data also deteriorates, the likelihood of a 50bp cut in September will increase.

The Fed's Cautious Stance

Despite Wall Street's predictions, the Fed maintains a cautious approach. Chicago Fed President Austan Goolsbee emphasized in a Bloomberg interview that "the Fed does not overreact to a single economic indicator." Similarly, Fed Chair Jerome Powell reiterated that the Fed does not base its policy decisions on just one or two data points.

Market Reaction and Outlook

Following the employment data release, the Nasdaq index plummeted by over 3% during the morning session, entering a technical correction phase with a drop of more than 10% from its recent high. This reaction underscores the market's sensitivity to potential rapid economic downturns and the possibility of significant Fed rate cuts. While major financial institutions anticipate consecutive 'big cuts' by the Fed, the Fed's cautious stance will be a critical factor in future policy decisions.

Wall Street's forecasts of consecutive 'big cuts' by the Fed in response to the deteriorating July employment data reflect growing concerns over the U.S. economy's rapid slowdown. Citigroup, JPMorgan, and Goldman Sachs are among the firms predicting multiple rate cuts within the year. However, the Fed's commitment to not overreact to single data points suggests a more measured approach. As uncertainty looms in the market, closely monitoring upcoming economic indicators and the Fed's responses will be essential.