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Fed seen cutting rates by 25 basis points at each of next five meetings - BofA

Published 09/09/2024, 04:50 AM
© Reuters.

Investing.com -- The Federal Reserve is expected to cut interest by 25 basis points at each of its next five meetings following a softer-than-anticipated August jobs report released last week, according to predictions from analysts at Bank of America.

Investors are now all but certain that the Fed will bring borrowing costs down from a 23-year high of 5.25% to 5.5% after the data showed that the US economy added 142,000 jobs last month, up from a heavily downwardly-revised mark of 89,000 in July. Economists had called for a reading of 164,000, an uptick from the initial July mark of 114,000.

Friday's release also showed the US unemployment rate at 4.2%, compared to July's figure of 4.3%. The level was in line with estimates.

Writing in a note to clients in the wake of the data, the Bank of America analysts said that the release has "increased the urgency for the Fed to get rates back in the vicinity of 'neutral,'" referring to the theoretical level where rates both support employment and keep inflation constant. Borrowing costs currently sit at a 23-year high of 5.25% to 5.5% after the central bank recently introduced a series of rate hikes aimed at corralling red-hot price growth.

But some policymakers, including Fed Chair Jerome Powell, have raised concerns that this elevated level could weigh on job demand.

On Friday, Fed Governor Christopher Waller said "the time has come" for the Fed to decrease rates. However, he noted that the pace of the cuts will be decided "in the future," adding that the Fed would act more forcefully if "subsequent data show a significant deterioration in the labor market."

The Bank of America analysts interpreted the comments to mean that "everything is on the table, but a 25-[basis point] cut is enough for Sep[tember]." They said a deeper, 50-basis point reduction could be seen by the markets as a sign that the Fed is "behind the curve" on supporting the jobs picture and "needs to move to an accomodative stance, not just get back to neutral."

Instead, they argued that the Fed will cut rates by 25 basis points in the next five meetings, through March 2025. After that, they forecast that the pace of reductions will slow to 25 basis points per quarter.

"Given the uncertainty around where neutral is, we think the Fed would move into fine-tuning mode once it gets rates to 4%," the analysts said.

Traders' bets that the Fed will bring down rates by 25-basis points later this month stood at 73% on Monday morning, according to the CME Group's (NASDAQ:CME) closely-monitored FedWatch Tool. Meanwhile, the probability of a 50-basis point cut stood at 27% after briefly jumping above 50% in the immediate wake of the jobs data.

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