The Fed had better act quickly? Citi expects a 50 basis point rate cut in September

British fund management company abrdn expects a soft landing for the US economy, but Kenneth Akintewe, the company's head of Asian sovereign debt, believes that there is still a long-term risk of slowdown in the US economy in 2025.

Akintewe raised a question on Monday on CNBC's "Squawk Box Asia": Has the Federal Reserve been sleepwalking into a policy mistake?

Citing economic data such as non-farm employment, he said that these data, after revisions, reflect a weaker economic situation. The US Department of Labor reported that from April 2023 to March 2024, the US economy created 810,000 fewer jobs than initially reported, a decrease of nearly 30% from the reported 2.9 million.

Akintewe questioned, "Is the economy weaker than what the data shows, and should the Federal Reserve have eased policy earlier?"

He added, "Policy changes by the Federal Reserve take time to impact the economy," so if the economy is weaker than the data shows, they need to accumulate enough easing measures, such as cutting interest rates by 150 to 200 basis points, which takes time. Once you implement such a large-scale easing policy, it takes six to eight months for it to transmit to the economy.

Akintewe stated that if the economy suddenly shows more signs of weakness in early 2025, it will not be until the second half of 2025 that the effects of any easing measures will be seen in the economy, by which time the economic situation could be "completely different."

He also believes that the market is too focused on predicting any potential rate cuts and asked, "It seems that no one is asking the other question: inflation has dropped to nearly 2.5%, why are policy rates still at 5.5%? In other words, in an environment of various uncertainties, does the real policy rate need to drop by 300 basis points?"

Data released in the US last Friday showed that the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose by 0.2% month-on-month as expected. This data seems to support a smaller rate cut.

According to data from CME's "FedWatch" tool, the market currently believes that there is a close to 70% chance of a 25 basis point rate cut at this month's meeting, with a 30% probability of a 50 basis point cut.

Wall Street believes that this week's non-farm payroll data could be a decisive factor in determining the magnitude of the Fed's rate cut in September.

Citigroup analysts expect a slight increase of 125,000 jobs in non-farm payrolls in August, slightly higher than the 114,000 in July, with the unemployment rate expected to remain stable at 4.3% or possibly drop to 4.2%.

Citigroup believes that if the employment report meets the bank's expectations, with job growth of 125,000 and an unemployment rate of 4.3%, the Federal Reserve will cut rates by 50 basis points at the upcoming September meeting. The reason for the rate cut is the downside risks in the labor market, especially when job growth is below 175,000 and the unemployment rate remains high Analysts pointed out that Federal Reserve Chairman Powell laid the foundation for a rate cut in September at the Jackson Hole meeting, while remaining open to a larger rate cut. They believe that a 50 basis point rate cut in September could be the start of a series of rate cuts by the Federal Reserve, with future rate decisions likely depending on economic data, especially labor market data