Fed to move to lower cuts, but jumbo cuts for weak jobs can’t be ruled out by Investing.com

Investing.com — The Fed is likely to move to smaller cuts at its two remaining policy meetings for the year, but a big hit to the labor market could force the central bank to continue its 50 basis point rate cut with a another jumbo size. cut to protect the economy,

“Despite a faster-than-expected first cut, the tone of the meeting, subsequent communications and recent US economic data leave us expecting two 25bp cuts at the end of the year,” Morgan Stanley analysts said in a note for months.

But a bigger rate cut cannot be completely ruled out, analysts said, highlighting the risk that weaker jobs data could force the Fed to adopt more accommodative policies.

Growth below 100,000 jobs for monthly wages would pose a risk to calling for two 25bp cuts at future Fed meetings. Analysts added this ahead of the September payrolls number due on Friday.

Economists expect the economy to have added 144,000 jobs in September, up from 142,000 the previous month, while the unemployment rate will remain unchanged at 4.2 percent.

The Fed offered a 50 basis point cut in September, surprising many who had expected the central bank to start the easing cycle with less than a 25 basis point cut.

After the meeting, Fed members continue to suggest that the labor market holds sway over future rate cut decisions.

“A surprise to the downside … would pull me a lot more into really needing another dramatic move,” Atlantic Fed President Bostic told Reuters in an interview earlier this week.

In Monday’s speech, Fed Chairman Powell also dampened hopes for a big cut at future meetings, saying he sees two more cuts “if the economy performs as expected.”

While the labor market showed signs of cooling, robust consumer spending gave Fed members some comfort that the economy can avoid recession and achieve a so-called soft landing.

Consumer spending in August rose as expected, with spending on services stronger than on goods. Recent data showed consumer spending up 3.1% in the third quarter.

“We continue to expect a broad deceleration through the end of the year, but no recession,” Morgan Stanley added.

The bank expects real GDP to grow by 2.2% in the fourth quarter compared to the same period a year ago.

Inflation, meanwhile, continues to moderate, with the Fed’s preferred measure of inflation, the core price index for personal consumption expenditures, coming in slightly below expectations.

August core PCE inflation is 2.6% for 2024, in line with the Fed’s median forecast from projections released at the Federal Open Market Committee’s September meeting.