Eliza Wong
Economists Unanimously Predict September Fed Rate Cut
Market analysts and economists are nearly unanimous in their expectation that the Federal Reserve will cut interest rates at its September meeting. According to a comprehensive industry survey conducted from September 8-11, an overwhelming majority of 105 out of 107 economists anticipate a 25-basis-point reduction in the federal funds rate. This would bring the target range down to 4.00%-4.25%, marking a significant shift from just a month ago when only 61% of economists held this view.
The dramatic change in expectations follows August’s disappointing non-farm payroll data, which showed nearly stagnant job growth. Additionally, substantial downward revisions to employment figures for the 12 months through March have prompted economists to reconsider their earlier projections. Many now believe the Fed will implement more rate cuts than previously anticipated as it seeks to address growing concerns about labor market weakness.
Michael Gapen, Chief US Economist at Morgan Stanley, emphasized the growing evidence of labor market softness: ‘The Fed now has evidence of four consecutive months of slowing labor demand, and this slowdown appears to be more persistent. Simply put, they should look past current inflation performance and support the labor market through accommodative policy.’
Labor Market Weakness Overrides Inflation Concerns
The Federal Reserve faces a complex balancing act between supporting employment growth and controlling inflation. Recent data suggests that labor market concerns are currently taking precedence. The August jobs report showed minimal growth, with just XX,000 jobs added compared to expectations of XX,000. This disappointing performance, combined with downward revisions to previous months’ data, has shifted the Fed’s priority toward supporting economic activity.
Despite inflation remaining above the Fed’s 2% target, the central bank appears willing to tolerate slightly higher price pressures to prevent further labor market deterioration. Survey respondents noted that inflation is expected to remain above target until at least 2027, while unemployment may persist around its current 4.3% level for several years.
Inflation Risks Remain Present
While the focus has shifted to labor market concerns, inflation risks haven’t disappeared. Among economists answering additional survey questions, over 60% expressed concern about potential inflation spikes or the simultaneous rapid increase of both inflation and unemployment in the coming year. This dual risk scenario complicates the Fed’s decision-making process and suggests that policy adjustments will require careful calibration.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, remains elevated at X.X%, well above the 2% target. Core PCE, which excludes volatile food and energy prices, stands at X.X%, indicating persistent underlying price pressures that could complicate the Fed’s easing cycle.
Divergent Views Among Fed Officials
The September meeting may see unusual dissent among Federal Reserve officials. At July’s meeting, Governors Waller and Bowman dissented from the decision to maintain rates unchanged, marking the first time in over 30 years that multiple Fed governors voted against the majority decision. Economists predict similar divisions could emerge at the upcoming meeting, with some officials potentially advocating for larger rate cuts while others might prefer maintaining current rates.
Stephen Juneau, US Economist at Bank of America, highlighted the challenging decision environment: ‘The current policy environment is exceptionally complex. I wouldn’t be surprised to see more dissent.’ He cautioned that the Fed risks policy errors if it becomes overly focused on one-sided arguments for aggressive easing without sufficient consideration of inflation risks.
Potential for 50 Basis Point Cut
While most economists expect a 25-basis-point reduction, two survey respondents anticipate a more aggressive 50-basis-point cut. This minority view reflects concerns about the rapid deterioration in labor market conditions and the need for more substantial policy support. However, the consensus remains that gradual easing is more likely, as the Fed prefers to assess the impact of each move before implementing additional changes.
Future Policy Path and Rate Projections
Looking beyond the September meeting, economists have revised their expectations for the Fed’s policy trajectory. Among the 107 survey respondents, 60% expect a total of 50 basis points in rate cuts by year-end, while 37% anticipate 75 basis points of easing—a significant increase from just 22% holding this view in August.
The survey median indicates that the Fed may cut rates by an additional 75 basis points in 2026, potentially bringing the federal funds target range to 3.00%-3.25%. This projection assumes continued labor market softness and a gradual moderation of inflation toward the Fed’s target.
Leadership Transition Considerations
With Chair Jerome Powell’s term ending in May next year, leadership considerations may influence policy decisions. Juneau noted: ‘If the new Fed chair is more dovish—as we expect—we believe the Fed will cut rates by another 75 basis points in the second half of next year. The willingness to ease and the extent of desired easing will become key questions during the next Fed chair’s selection process.’
Despite potential leadership changes, 76% of surveyed economists expect the Fed’s independence will remain largely intact through the transition period. This confidence in institutional stability suggests that policy continuity will likely be maintained regardless of leadership changes.
Market Implications and Investment Considerations
The anticipated Fed rate cuts have significant implications for financial markets and investment strategies. Bond markets have already begun pricing in expected easing, with Treasury yields declining across the curve. Equity markets may benefit from lower borrowing costs, particularly rate-sensitive sectors such as technology and growth stocks.
For currency markets, the dollar may face downward pressure as interest rate differentials narrow relative to other major economies. However, the dollar’s status as a safe-haven currency could provide support if global economic concerns persist.
Portfolio Positioning Strategies
Investors should consider several strategies in anticipation of Fed easing:
– Duration extension in bond portfolios to capitalize on declining yields
– Increased allocation to quality growth stocks that benefit from lower financing costs
– Consideration of real assets that may provide inflation protection
– Diversification across geographic regions with different monetary policy cycles
Economic Outlook and Risk Assessment
The US economic outlook remains mixed, with strength in some sectors offset by weakness in others. Consumer spending has remained resilient despite higher interest rates, supported by a strong labor market and rising wages. However, business investment has shown signs of softening, particularly in interest-sensitive areas such as housing and capital expenditures.
Global economic conditions also influence the Fed’s decision-making. Slowing growth in major economies including China and the Eurozone creates additional headwinds for US exports and manufacturing. Geopolitical tensions and trade policy uncertainties further complicate the outlook.
Downside Risks and Contingency Planning
Economists identified several potential downside risks:
– Accelerated labor market deterioration requiring more aggressive policy response
– Renewed inflation pressures limiting the Fed’s ability to provide support
– Financial stability concerns arising from rapid policy changes
– External shocks from global economic or geopolitical developments
Preparing for the Evolving Policy Environment
As the Federal Reserve prepares to embark on a new easing cycle, market participants should prepare for several scenarios. The central bank’s communication will be crucial in managing expectations and preventing market volatility. Clear guidance about the policy path and reaction function will help anchor market expectations and support orderly adjustments.
For businesses and consumers, lower interest rates should provide welcome relief from financing costs. Mortgage rates may decline, supporting housing market activity, while corporate borrowing costs should decrease, encouraging investment and expansion.
However, the effectiveness of monetary policy may be limited by existing structural factors, including elevated debt levels and changing demographic trends. These constraints suggest that fiscal policy may need to play a larger role in supporting economic activity in the future.
Monitoring Key Indicators and Fed Communications
Market participants should closely monitor several key indicators in the coming months:
– Monthly employment reports for signs of labor market stabilization or further deterioration
– Inflation data to assess whether price pressures are moderating as expected
– Fed communications for guidance on future policy intentions
– Global economic developments that may influence US economic conditions
The Fed’s data-dependent approach means that policy decisions will remain contingent on incoming information. Flexibility and responsiveness to changing conditions will characterize the central bank’s approach throughout the easing cycle.
As we approach the September meeting and beyond, staying informed about economic developments and Fed policy signals will be essential for making sound financial decisions. Regular review of economic indicators and expert analysis can help navigate the evolving landscape of monetary policy and its market implications.
For the latest updates on Federal Reserve policy and economic analysis, continue monitoring reputable financial news sources and consider consulting with financial professionals to adjust strategies according to the changing policy environment.
