Investing.com -- U.S. interest rates remain at the highest level in decades and many are calling on the Federal Reserve to cut rates to ensure that the path to a soft landing remain intact, but while central bank could justify a cut, the risk of pre-emptive rate cuts fueling a re-acceleration is "too great.'
"The Fed can cut rates but doesn't have to... yet," Jefferies said in a Friday note, pointing to underlying strength in the economy suggesting that no accommodation from the Fed is needed. "The risk of restoking the flames of inflation are too great to warrant pre-emptive rate cuts," it added.
The resilience in the U.S. economy has caught by many surprise, Jefferies admits as it ditched its recession call after pushing it back several times. But while there are signs of slowing growth, Jefferies doesn't believe that the risks of an outright recession have risen materially, though persists with its call for one cut this year either in November or December.
The call for one cut matches that of the Fed's. During the June FOMC meeting, voting Fed members cut their outlook for rate cuts from three this year to just one amid expectations for inflation to remain higher than previously expected.
But market consensus is currently looking for a cut as soon as September, with the odds at about 61%, according to Investing.com's Fed Rate Monitor Tool.
Beyond 2024, however, there is hope for steeper cuts as the Fed's fight against inflation could get a helping hand from improved productivity, Jefferies says, at a time when labor turnover is easing, suggesting that workers aren't as willing to switch jobs for higher pay as they may have been in the past.
If the inflation relief coming from higher productivity manifests, Jefferies estimates that "there could be more room for a few more cuts late in 2025 or in 2026."