Substantially weaker US employment figures for July are fuelling expectations that the Federal Reserve may cut interest rates by 50 basis points in September, and even by as much as 100bp in the next three months.

“Many in the market now believe that a 50bp cut in September is a done deal, and do not rule out a further reduction of 50bps in November,” says Gary Dugan, chief executive officer of The Global CIO Office.

Fears that the US labour market was deteriorating and potentially making the economy vulnerable to a recession grew after official data on August 2 showed that the jobless rate jumped to a near three-year high of 4.3% in July.

Expectations of a 50-100bp rate cut in the next three months also came after a market sell-off on August 5 saw the S&P 500 drop 160.23 points or 3% to close at 5,186.33, its largest single-day loss since 2022, while other major benchmarks globally also declined sharply. Markets have recovered a bit and stabilized but volatility remains high.

“Market sentiment has largely recovered, although there will be a legacy shock to the system which may make investors more discerning in crowded trades. We note the substantial outflows from non-investment-grade bond funds and the tentative recovery in tech stocks,” Dugan says.

Cautious approach

However, not everyone is convinced that the Fed will cut rates by as much as 50bp in September as they cite its traditionally cautious approach to monetary policy. There is also some talk that the situation is serious enough to warrant the Fed implementing an emergency rate cut before its September 17-18 meeting.

“The Fed will not, in my opinion, execute an emergency cut between now and the September meeting. There is no emergency so there is no justification for it,” says Kristina Cooper, chief global market strategist at Invesco.

“In fact, if they did cut rates before September, I think it would cause major market jitters. I believe Fed rate cuts will be measured at first. I also believe cutting more than 25 basis points in September would cause market jitters as it suggests the Fed has become far more concerned about the health of the economy,” Cooper adds.

Other analysts argue that that the markets have quickly replaced the “risk management” introduced by the Fed on July 31 with a sense of urgency to cut interest rates, citing the fact that bonds rallied violently following the unemployment report and the yield curve almost completely un-inverted itself.

Multiple rate cuts

“This is the usual pattern when a cutting cycle is imminent. Analysts are openly questioning whether the Fed’s decision to hold rates steady in July was a mistake. Many economists are now forecasting one or multiple 50 basis point rate cuts by the Fed this year, starting in September,” say global macro strategist Dominique Lapointe and senior global macro analyst Erica Camilleri, both of the multi-asset solutions team, at Manulife Investment Management.

Manulife IM is sticking to its forecast that there will be three rate cuts in 2024, although it will closely monitor the data over the coming weeks to assess if the US economy needs a faster pace of easing and if the Fed is willing to deliver it.

“Our view is more sanguine: the labour market shows signs of cracking but is not yet collapsing. Consumption is holding up as real wages are positive, and business investment continues to be strong. While we still anticipate a significant economic slowdown, our forecast is consistent with a steady pace of 25 basis point cuts, not a knee-jerk reaction to selected data points,” Lapointe and Camilleri say.