The latest jobs report has put the Fed in a difficult position, potentially setting the stage for a hard landing for the economy. According to The Wall Street Journal, the unexpected weakness in the jobs data has prompted the Fed to consider significant rate cuts in the coming months.
Major financial institutions, including Citi and JPMorgan, predict the Fed will cut interest rates in a series of steps: 50 basis points (bps) in September, another 50 bps in November and 25 bps in December. CME data puts the probability of a 25 bps cut in September at 78% and the probability of a 50 bps cut at 22%.
JPMorgan sees the Fed eventually cutting its benchmark interest rate to around 3%, with rate cuts continuing through the third quarter of 2025. This aggressive monetary easing is seen as a necessary response to worsening economic indicators.
Throughout the year, Fed officials focused on achieving a “soft landing,” in which inflation is reduced without triggering a recession in the economy. Recent declines in inflation have raised questions about the sustainability of full employment.
But the potential for an economic downturn also has political implications. “It goes without saying that if the economy turns around, Harris’s chances of becoming president are diminished,” said Marc Sumerlin, an economist who advised President George W. Bush.
How the Fed responds in the coming months will be crucial in determining whether the current economic weakness is a temporary blip or the start of a more serious downturn. “Inflation is no longer a problem. The situation has completely changed,” said Laurence Meyer, a former Fed governor.
*This is not investment advice.
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