Citi economists predict the Fed will cut interest rates by 125 basis points this year

Federal Reserve Chairman Jerome Powell hinted that the time is ripe for a rate cut. The market is generally expecting the Federal Reserve to launch an easing cycle in September, while U.S. Treasury bond prices have risen for the fourth consecutive month, setting a record for the longest consecutive rise in three years. Citi economists predict that the Federal Reserve may significantly cut interest rates by 125 basis points this year, and the rate cut may exceed market expectations.

Citi economist Robert Sockin said in an interview with Yahoo Finance that in the face of rising unemployment, the Federal Reserve may cut interest rates more than expected and is expected to cut interest rates by 125 basis points before the end of the year. He noted that this forecast is based on changes in the labor market and rising unemployment. He emphasized that if the unemployment rate continues to rise, the Fed may take more drastic measures.

The U.S. unemployment rate rose to 4.3% in July from 4.1% in June, and the number of people applying for unemployment benefits has declined in recent weeks, but only to a limited extent. Sockin believes that if the unemployment data continues to be poor, it will be difficult for the Fed not to take more proactive action.

The Bank of America strategist team warned that the recent rise in U.S. Treasury bonds has been too large, and four major factors may cause yields to stop falling and rebound, especially long-term yields. The 30-year yield has plummeted from 4.82% at the end of April to 4.05%, but this may change in the future.

The annual growth rate of the U.S. personal consumption expenditures (PCE) price index remained at 2.5% in July, the same as in June. In addition, the number of corporate layoffs was relatively moderate, and the annual growth rate of gross domestic product (GDP) in the second quarter rose from 2.8%. Revised to 3%, these factors have reduced market expectations for a sharp interest rate cut by the Federal Reserve in September.

CME's Fed Watch shows that the market expects a 70% chance that the Fed will cut interest rates by 25 basis points in September, while the possibility of a 50 basis point cut has dropped to 30% from 36% a week ago.

Since 2022, the 10-year and 2-year U.S. Treasury yield curves have continued to invert, reflecting market concerns about an economic recession. As Powell announced that the time has come for policy adjustments, the yield on the 2-year U.S. Treasury note has fallen more than the yield on the 10-year U.S. Treasury note, and the interest rate gap between the two has narrowed rapidly. Although the yield curve turning positive has always been a reliable recession signal, many indicators currently show that economic conditions may be weaker than expected, so labor market data has become key.

The U.S. non-farm payrolls report for August, which will be released on September 6, has attracted much attention from the market. Jarvie, head of global bond and interest rate strategy at ING Financial Markets, said that unless the labor market weakens sharply, such as the number of new jobs being created is far lower than expected and the unemployment rate rises further, the Federal Reserve will not cut interest rates next month,50 basis points.