Fed Holds Rates Steady: Wall Street Eyes Potential September Cut Amid Economic Signals

Federal Reserve holds interest rates steady, sparking Wall Street speculation of a September rate cut. Economic indicators and labor market weakness fuel expectations, with investors closely watching for signals from Fed Chairman Jerome Powell's upcoming Jackson Hole speech.

Staff Editor August 22, 2024 2 min read

Federal Reserve Holds Rates Steady, Wall Street Anticipates September Cut

The U.S. Federal Reserve Board Chairman Jerome Powell announced that interest rates will remain unchanged, following a series of ten consecutive increases. This decision has sparked widespread speculation on Wall Street, with most investors predicting a 25-basis-point interest rate cut in September.

Recent economic indicators have fueled expectations of a rate cut. July’s weaker-than-expected jobs report and an increase in unemployment to 4.3% suggest a potential economic cooldown. Downward labor revisions have further bolstered the case for policy easing. The CME FedWatch Tool currently indicates a 75.5% probability of a quarter-point rate cut in September.

However, some economists argue for more aggressive action. Claudia Sahm, a prominent economist, advocates for a 50-basis-point cut, citing labor market weakness. Sahm emphasizes the Fed’s mandate for maximum employment over avoiding a recession, suggesting that a deeper reduction would align with those who believed easing should have commenced in July.

Jeremy Siegel, a respected financial expert, concurs with the need for faster rate cuts to mitigate recession risks. Siegel contends that the current fed fund rate of 5.25% to 5.50% is overly restrictive. He estimates the neutral rate at 2.8%, based on the 10-year bond yield, arguing that monetary policy is becoming unnecessarily tight as inflation approaches the Fed’s target rate.

Not all analysts share this view. Apollo chief economist Torsten Slok believes the Fed has time to adjust policy, citing evidence from retailer data and weekly jobless claims that suggest the economy remains robust.

Investors are now looking to Chairman Jerome Powell’s upcoming speech at the Jackson Hole Symposium for further insights into the Fed’s plans. As the economic landscape continues to evolve, the Federal Reserve’s next moves will be crucial in shaping the financial outlook for the coming months.