Traders Expect 1.25% Rate Cuts By Year-End: Fed's Goolsbee Focuses On Jobs, Analysts See 0.5% Cut In September

Expectations for future interest rates were dramatically altered after disappointing labor market data sent warning signals across Wall Street.

The pace of non-farm job creation slowed significantly last month, with only 114,000 jobs added, a sharp drop from 179,000 in June and well below the expected 150,000. The unemployment rate rose by 0.2 percentage points to 4.3%, marking its highest level since October 2021.

Market-implied probabilities for a 50 basis point rate cut in September surged to nearly 70%, more than tripling from the previous day’s figures. This reflects the belief that the Fed missed the chance to cut rates in July and now needs to implement more substantial cuts to address the situation.

Looking beyond September, investors anticipate that the Fed will take an aggressive stance on rate cuts, aiming to reduce the federal funds rate to between 4% and 4.25% by year-end. This implies a total reduction of 125 basis points from the current level of 5.25%-5.5%.

The significant shifts in interest rate expectations led to a major market impact, resulting in a sharp rally in U.S. Treasury bonds, especially in longer-dated maturities. The iShares 20+ Year Treasury Bond ETF TLT surged 2.8% on Friday, marking its largest one-day gain since March 2023.

The table below presents the aggregated interest rate probabilities for the upcoming three Federal Reserve meetings:

MEETING DATE	4%-4.25%	4.25%-4.5%	4.5%-4.75%	4.75%-5%	5%-5.25%
09/18/2024				68.5%	31.5%
11/07/2024		31.68%	68.32%
12/18/2024	57.5%	42.5%

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Fed’s Goolsbee Highlights Need To Address Employment Mandate

“We’d never want to overreact to any one month’s numbers… if we stay restrictive for too long, we’re going to have to think about the employment side of the mandate,” Chicago Fed President Austan Goolsbee said in a Bloomberg interview on Friday.

While the policymaker avoided speculating on the Fed’s next move or whether it should have acted earlier, he acknowledged that current conditions are restrictive.

“Between now and the next meeting… what will determine the size or, if there is action at all, will be the conditions.”

According to Goolsbee, the trends show inflation coming down across the board and the labor market cooling.

“When conditions warrant a cut, there tends not to be just one,” he stated.

Economists Reinforce Rate-Cut Calls

Economists at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. heightened their expectations for rate cuts on Friday, with some of them now expecting larger 50-basis-point moves.

• Bank of America now anticipates rate cuts in September and December. Economist Michael Gapen continues to project a gradual pace of easing, as inflation remains above the Fed’s 2% target and the Fed must balance both sides of its dual mandate. They also lower their forecast for the terminal rate in the upcoming easing cycle to 3.25-3.5%, a reduction of 25 basis points from their previous estimate.
• Economists at Citigroup now anticipate half-point rate cuts in September and November, followed by a quarter-point cut in December, revising their earlier prediction of quarter-point cuts at all three meetings. Veronica Clark and Andrew Hollenhorst forecast that the Fed will continue to reduce rates by a quarter point at each meeting until mid-2025, ultimately bringing the policy band down to 3% to 3.25%.
• Goldman Sachs economist Jan Hatzius now expects 25 basis point rate cuts in September, November, and December, revising his previous forecast of cuts at every other meeting. He stated that if the August employment report is weak and confirms the slowdown in job growth, a 50 basis point cut at the September meeting would likely occur.
• JPMorgan Chase & Co. economist Michael Feroli took an even more dovish stance. While he also anticipates half-point rate cuts in September and November, followed by quarter-point reductions at every subsequent meeting, Feroli stated there is "a strong case to act" even ahead of the next meeting on Sept. 18. However, he also indicated that Fed Chair Jerome Powell might refrain from making any preemptive moves to avoid adding further noise to an already eventful summer.

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Image created using artificial intelligence via Midjourney.