Powell: The U.S. labor market has cooled sufficiently. Citigroup predicts that interest rates will be cut eight times in a row in September, returning to 3.25-3.5% by mid-2025

Citigroup analysts predict that the Federal Reserve will cut interest rates consecutively starting in September due to signs of a slowdown in the US economy. The Fed is expected to cut interest rates by 0.25% each time, for a total of 8 times, and by mid-2025, the current interest rate will drop from 5.25%-5.5% to 3.25%-3.5%.

Citigroup Chief US Economist: Estimated 8 consecutive interest rate cuts starting in September

Citigroup Chief US Economist Andrew Hollenhorst led the forecasting team. They observed that the US economy has cooled after a period of strong growth in 2023. Although inflation has been persistent before, it has shown signs of easing. The ISM service sector indicator recently turned negative, and the unemployment rate rose to 4.1% in June. These factors increase the possibility of accelerated interest rate cuts.

Fed Expected Actions

Citigroup emphasized that recent data and dovish remarks from Fed Chairman Jerome Powell indicate that the first interest rate cut may occur in September. Powell mentioned that he was pleased with the progress in reducing inflation over the past year, but stressed that more favorable developments need to be seen before confidently starting to cut interest rates. When asked about a possible rate cut in September, Powell did not give a clear answer.

Weak employment data

The report also pointed out that the US non-farm payrolls data showed signs of weakness in June. Although jobs appeared to have increased steadily by 206,000, the data for previous months were revised down. In addition, temporary service jobs decreased by 49,000, and such declines are usually seen during recessions as companies reduce their most expendable labor.

Citibank pointed out that wage data may be tilted upward, making the unemployment rate a key indicator. They cited the Sam's rule, noting that this recession indicator may be triggered in August if the unemployment rate continues to rise at its current rate. The Sam's rule, developed by Fed economist Claudia Sam, states that a recession begins when the three-month average unemployment rate rises by at least 0.5 percentage points from the low point of the past 12 months.

Jerome Powell: The U.S. labor market has cooled sufficiently

Federal Reserve Chairman Jerome Powell said at a Senate hearing that the U.S. labor market has cooled significantly and returned to pre-epidemic levels. He mentioned that inflation has been improving in recent months, which strengthens the case for rate cuts.

Powell pointed out that the Fed now faces dual risks and cannot focus only on inflation. He explained that an early or delayed rate cut could affect the Fed's dual mission of full employment and price stability.

Inflation has shown signs of improvement in the past few months. Powell said that more positive data would strengthen the case for a more accommodative monetary policy. Recent data showed slight progress, and further positive data would strengthen the Fed's confidence that inflation is moving towards the 2% target.

Despite acknowledging these improvements, Powell did not provide a specific timetable for future rate cuts.

Rate cut signal

Nick Timiraos, a reporter for the Wall Street Journal and known as the "Fed Whisperer", analyzed Powell's speech. He pointed out that Powell's remarks sent a subtle but important shift, bringing the Fed closer to a rate cut. The Fed has historically viewed an overheated labor market as the main risk to fighting inflation. However, that view is now changing.

Timilaos stressed that Fed officials are trying to balance the risks of cutting rates too slowly or too quickly. Although layoffs are low now, they tend to increase quickly as the economy weakens, providing a reason to maintain too high interest rates.

Future actions of the Fed

Last month's interest rate dot plot showed that most Fed officials expect to cut interest rates 1 to 2 times this year if inflation slows and economic growth remains stable but not overheated. The next Federal Open Market Committee meeting will be held on July 30-31, and Timilaos pointed out that the market is focused on whether this meeting will send a stronger signal of a September rate cut.

Timilaos concluded that the previous volatility in inflation has put the Fed in a difficult position. They must wait for several months of convincing mild inflation data or clear evidence of weak employment and economic activity before continuing to cut interest rates.

The probability of a Fed rate cut in September has increased to 73.6%

According to the Chicago Mercantile Exchange's FedWatch tool, the market currently expects a 73.6% chance of a 0.25% rate cut in September, up from 57.9% at the end of last month. The probability of the Fed maintaining the current interest rate has dropped to 22.9%.