JPMorgan and Citigroup’s revisions regarding a potential July rate cut by the Federal Reserve have stirred significant interest among market observers, signaling a shift in expectations for monetary policy. Last Friday’s release of the jobs report acted as a pivotal moment, prompting these major financial institutions to discard their earlier forecasts. Now, the consensus among sell-side economists and professional Fed watchers suggests that the likelihood of rate cuts later in the year, possibly in September or December, has become more pronounced.
Initially, there was a sense of optimism among major banks regarding the prospect of rate cuts. Citigroup, for instance, had forecasted a July rate cut as the first of four expected cuts for the year. However, recent data revealing weaknesses in job openings and private-sector job creation has prompted a reassessment of these expectations. Consequently, market sentiment now leans toward the anticipation of Fed rate cuts beginning as early as September, rather than waiting until December.
Citigroup’s forecast for a July rate cut was contingent upon softer labor market data, reflecting expectations of a slowdown. However, the unexpectedly robust hiring surge in the US last month, with employers adding 272,000 jobs in May compared to the anticipated 185,000, has challenged these assumptions. This strong hiring performance, occurring despite the backdrop of the highest borrowing costs in over two decades, has raised questions about the timing and necessity of future rate cuts.
Similarly, JPMorgan economists initially clung to their prediction of a July rate cut, citing April inflation readings. However, they acknowledged the need for further evidence of cooling in labor market activity for this scenario to materialize. The unexpected strength in hiring has prompted a reconsideration of these forecasts, with implications for the timing and magnitude of potential rate adjustments by the Fed.
The differing predictions among major banks regarding the timing and scale of rate cuts by the Federal Reserve reflect the uncertainty prevailing in the market. Bank of America, BNP Paribas, and RBC anticipate the first cut in December, with relatively modest reductions of 25 basis points each. In contrast, Citigroup and Morgan Stanley envision a more significant 75 basis point cut in September, while HSBC and Barclays forecast more conservative cuts of 25 basis points in September.
These varying perspectives underscore the complexity of the current economic landscape and the challenges facing policymakers at the Federal Reserve. The central bank’s decisions regarding interest rates are closely monitored by market participants, with recent developments prompting revisions in rate cut expectations. The timing and magnitude of these potential cuts remain uncertain, contingent upon evolving economic indicators and the Fed’s assessment of prevailing economic conditions.
In summary, the revisions made by JPMorgan and Citigroup regarding their rate cut forecasts reflect the dynamic nature of monetary policy discussions and the influence of economic data on market expectations. As the Federal Reserve navigates these uncertain waters, its decisions will continue to shape the trajectory of financial markets and the broader economy.