• Economist Lauren Saidel-Baker expects rates to be slashed by a total of 25 to 100 basis points between the second half of 2024 and early 2025
• ‘Inflation will again rear its head in 2025 and limit the Fed’s ability to continue cutting rates,’ says Saidel-Baker

ISTANBUL

The US Federal Reserve has signaled that an interest rate cut is around the corner, but the burning question now is about the extent.

More specifically, the debate is whether the Fed will go for a reduction of 25 or 50 basis points, with various experts and analysts offering diverging opinions on the possible decision.

For Michael Brown, a senior research strategist at Australia-based online forex and brokerage firm Pepperstone, a cut of 25 basis points seems a more practical outcome.

Unless there is further deterioration in labor market conditions, a larger cut will send out a message of panic, he warned.

“The August jobs report, due Sept. 6, will be the key determinant,” he told Anadolu.

Last Friday, Fed Chair Jerome Powell said the Federal Open Market Committee (FOMC) “does not seek or welcome further cooling in labor market conditions.”

The July jobs report showed US unemployment rate rising to 4.3% in from 4.1% in June, stoking fears of a recession in the American economy and causing major turbulence in global stock markets.

Markets have recovered with rising hopes that the Fed will use its Sept. 18 meeting to announce its first rate cut since March 2020, when the COVID-19 pandemic upended world economies.

Powell indicated as much at the central bank’s annual Jackson Hole symposium, saying that the “time has come” for an adjustment in monetary policy.

“Confirmation that the first cut will be delivered in four weeks’ time has kept the bulls in control of the equity space, with the S&P inches away from a fresh record high,” said Brown.

Last week, the Dow Jones Industrial Average gained 1.3%, and the S&P 500 rose 1.45%, while the tech-heavy Nasdaq Composite increased 1.4%.

Cooling labor market

Although Powell signaled that the FOMC is gearing up for a rate cut, he gave no clues about its magnitude.

“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.

As of Tuesday, the probability of a rate cut of 25 basis points stood at 71.5%, while that of a rate cut of 50 basis points was at 28.5%, according to the FedWatch Tool provided by the Chicago Mercantile Exchange Group.

Lauren Saidel-Baker, an economist at US-based research and consulting firm ITR Economics, said “some Fed watchers are speculating that a 50-basis-point cut could be on the table.”

“Powell did not address the magnitude or pace of the upcoming cuts, only noting that the path of interest rates would remain data-dependent,” she said.

She believes the Fed is likely to begin the cycle with a 25 basis points decrease in September, and expects Fed officials to make statements expressing confidence that inflation is moving toward the 2% target.

“For now, the focus has clearly shifted to the other leg of the dual mandate: employment. Powell was careful to note that the recent rise in unemployment was primarily due to an increase in the number of workers, rather than macroeconomic-driven layoffs,” she told Anadolu.

A recent revision made in US payroll figures signaled cooler but still healthy labor market growth in the world’s biggest economy.

Non-farm payroll growth in the US was revised down by 818,000 for the 12-month period ending March this year, according to the latest Labor Department figures released Aug. 21.

The figures showed that 2.1 million jobs were added between April 2023 and March 2024, lowered from the initial number of 2.9 million.

‘Inflation will again limit Fed’s ability to continue cutting rates’

Saidel-Baker pointed out that the “fundamental drivers of the next inflationary cycle are already firmly in place.”

These suggest that “inflation will again rear its head in 2025 and limit the Fed’s ability to continue cutting rates,” she said.

“Beyond the September start date, the duration of the cutting cycle and the overall magnitude of cuts are likely to disappoint market participants who have been anxiously awaiting easing policy,” she added.

In total, Saidel-Baker expects interest rates to be slashed by 25 to 100 basis points between the second half of 2024 and early 2025.

“Next year, the macroeconomic cycle will turn upward again, but with inflation and labor force concerns returning, interest rates will not return to their recent lows,” she said.

Consumer inflation in the US rose 2.9% in July, the lowest annual increase since March 2021, slowing down from a year-on-year gain of 3% recorded in June.

The figure was also a sharp decline from the 9.1% annual gain recorded in July 2022, which was the highest since November 1981.

The Fed made a total of 11 interest rate hikes between March 2022 and July 2023 to tame record-high inflation, carrying the federal funds rate to the 5.25%-5.5% target range – the highest in 22 years. It skipped four rate hikes last year, and five more this year.