Key Insights:
- Goldman Sachs and Citi expect rate cuts in September if labour data weakens.
- Historic job revisions indicate a slowing economy and rising recession fears.
- A dovish Fed stance and other political changes may speed up the rate of monetary easing.
A Fed rate cut may be seen as early as September. Recent data shows that the US labour market is cooling very quickly.
This trend has prompted firms like Goldman Sachs and Citi to revise their predictions. They now expect the Fed rate cut cycle to begin sooner and more aggressively than expected.
The possibility of a 50 basis point cut is already gaining traction, especially if job numbers continue to deteriorate. And some experts believe the Fed’s policy rate could fall to 3% or even lower in the next few months.
Job Growth Stalls, Fueling Talks of Fed Rate Cut
The latest employment data is slightly more troubling than analysts expected. Goldman Sachs reported that monthly job growth fell from 206,000 in Q1 to just 28,000 in July. Citi also noted that revisions to data from previous months indicate that the labour market is weakening fast.
July’s non-farm payroll increase of only 73,000 fell far short of the 110,000 forecast. Meanwhile, the unemployment rate climbed to 4.2%, causing worries about the health of the US economy.
These numbers are especially worrying because they come with major downward revisions. According to Goldman Sachs, the labour market is moving past a “moderate slowdown” into “sharp deceleration.”
The firm believes the economy is now hovering close to stall speed. These critical points are the basis for speculations about expecting a Fed rate cut soon.
Political Changes Add Pressure For a Fed Rate Cut
The resignation of Federal Reserve Governor Adriana Kugler has also introduced a new political variable. President Trump now has the power to appoint a replacement for Kruger and possibly a new Fed Chair.
Trump now has what he needs to push the central bank’s direction toward a more dovish stance. At the latest FOMC meeting, two Fed officials, Christopher Waller and Michelle Bowman, favored a Fed rate cut.
This was the first dual dissent of this kind since 1993. It is a clear sign that the FED could lean towards monetary easing.
Goldman Sachs and Citi Forecast a Lower Terminal Rate
Goldman Sachs and Citi are now forecasting a series of rate cuts, starting in September. Goldman expects three consecutive 25-basis-point cuts in September, October, and December.
On the other hand, Citi’s base case predicts a policy rate falling to 3%. There is the possibility of even deeper cuts.
If job losses continue or wage growth weakens, the Fed may opt for a 50-basis-point cut in September. It’s a rare and aggressive move. More economic indicators also support this expectation.
For example, real GDP growth in the year’s first half was just 1.2%. This was well below the 2.2% estimates. Also, Goldman Sachs doesn’t expect improvement in the second half either.
Why the Fed Rate Cut May Be Unavoidable
Another primary reason for the urgency of a Fed rate cut is the scale of recent job data revisions. According to Goldman Sachs, the U.S. saw the largest two-month payroll adjustment since 1968 (outside of a recession).
These revisions are not limited to private-sector jobs. Public sector losses, especially in state and local governments, accounted for much of the drop. This adds more credibility to predictions that extra downward revisions are still coming.
While the Fed leans toward easing, other central banks remain firm. The European Central Bank (ECB) is expected to hold rates near 2%. This contrast is expected to widen the policy divergence further. It could lead to more downward pressure on the U.S. dollar.
Goldman Sachs noted that the dollar is already 15% above its long-term average. Combine that with a 4% current account deficit, and the dollar’s strength could be at serious risk: A significant win for the crypto market, regardless.
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