Wall Street major banks expect the Federal Reserve to cut interest rates twice this year to address the cooling labor market

According to the Zhitong Finance APP, economists from Bank of America (BAC.US), Citigroup (C.US), Goldman Sachs (GS.US), and JP Morgan (JPM.US) adjusted their forecasts for US monetary policy after the release of data showing a rise in the US unemployment rate in July. They called for early rate cuts, larger rate cuts, or more frequent rate cuts.

Citigroup economists Veronica Clark and Andrew Hollenhorst stated that they expect rate cuts of 50 basis points in September and November, and 25 basis points in December, compared to their previous forecast of 25 basis points for each of the three meetings. They predict that the Fed will cut rates by 25 basis points at each meeting until mid-2025, bringing the policy range to 3% to 3.25%.

Friday's employment report showed a significant slowdown in hiring in the US, with the unemployment rate rising to 4.3%, the highest level in nearly three years. The rise in the unemployment rate pushed its three-month moving average up by 0.5 percentage points from the 12-month low. According to the Sahm rule proposed by former Fed economist Claudia Sahm, this indicates that an economic recession is underway.

This data further fueled a rebound in the US bond market, with the yield on the two-year US Treasury falling by up to 31 basis points to 3.84%, the lowest level since May 2023, before rebounding slightly.

Federal Reserve policymakers earlier this week indicated that they plan to start lowering borrowing costs as early as September, after borrowing costs reached a 20-year high within a year. However, at a press conference after the meeting, Powell stated that a half-point rate cut "is not something we are considering right now." He also reiterated that if there is unexpected weakness in the labor market, the Fed is "prepared to respond."

JPMorgan's Feroli wrote, "In hindsight, it's easy to say the Fed should have cut rates this week. Even if the slowdown in labor market conditions eases from here, the Fed is at least 100 basis points off, possibly more."

Interest rate swaps show that traders believe there is a more than 70% chance of a half-point rate cut in September, and they expect a total cut of about 119 basis points by the end of the year. In the federal funds futures market, there was a large amount of buying on Friday, in line with banks' calls for aggressive easing.

This price action harks back to the early-year divergence when the market implied expectations of up to six rate cuts this year. Fed policymakers at the time expected a 75 basis point cut, based on their median forecast, which was reduced to 25 basis points in June.

Chicago Fed President Evans stated on Friday that the Fed will not overreact to any economic data, echoing Powell's comments on Wednesday Following the release of the employment report, economists at Barclays Bank (BCS.US), Goldman Sachs (GS.US), and TD Bank (TD.US) have added a 25 basis point rate cut in November on top of their previously predicted rate cuts in September and December 2024. Goldman Sachs economist Jan Hatzius wrote in a report that the July data may have exaggerated weakness in the labor market, but if the August report also shows weakness, then a 0.5 percentage point rate cut in September "will become quite likely."

The U.S. Bank economists led by Michael Gapen had previously believed that rate cuts would start in December, but now they expect the first rate cut to take place in September