The U.S. Federal Reserve will announce its interest rate decision at 2 a.m. Taiwan time on Thursday (8/1), and the market generally expects interest rates in July to remain unchanged in the range of 5.25% to 5.5%. Wall Street Journal reporter Nick Timiraos, known as the Federal Reserve's "Fed mouthpiece," also wrote an analysis this week. It is expected that officials will send a clear signal to cut interest rates in September at this meeting.
Citi analysts also pointed out in a report this month: "The market is widely expected that Fed officials will keep interest rates unchanged on Wednesday, but should send a clear signal that the first 25 basis point interest rate cut will be implemented at the next meeting in September. "
The U.S. Federal Reserve's terminal interest rate will drop to 3.25-3.5% in 2025
The report said this would result in a substantial 200 basis point reduction in the federal funds rate from current levels. Citigroup Chief U.S. Economist Andrew Hollenhorst pointed out that as the economy has weakened this year, recent data supports signs of slowing inflation. The core PCE inflation data has decelerated and the housing inflation rate has also declined, which should give Federal Reserve officials a start. Confidence in rate cuts.
Analysts also emphasized that rising unemployment may force the Federal Reserve to take quick action to cut interest rates. "Rising unemployment may increase the sense of urgency to cut interest rates in the coming months."
These data, as well as dovish comments released by Federal Reserve Chairman Jerome Powell this month, indicate that the first rate cut is likely to be carried out in September.
In our base case scenario, continued weakness in economic activity will result in rate cuts at each of the next seven Fed meetings.
Rising U.S. unemployment rate sounds recession warning
On the other hand, Citi analysts led by Hollenhorst also warned about employment data, reporting that the Institute for Supply Management (ISM) services index (non-manufacturing PMI) suddenly reversed to negative values, while the monthly employment report showed The unemployment rate rose to 4.1%, "raising the risk of further weakness in economic activity and the need for faster interest rate cuts."
The report also noted other signs of weakness in the jobs report, including a downward revision to previous months' data and a 49,000 decline in temporary services jobs in June, which Citi called "the type of decline common during recessions."
The Citi report also warned that if the unemployment rate continues to rise at the current rate, the famous "Sahm Rule" recession indicator may be triggered in August.
Can September interest rate cut successfully achieve a soft landing?
Hollenhorst maintained his pessimistic view on the U.S. economy even as Wall Street consensus shifted toward a soft landing. He has repeatedly warned this year that the United States is headed for a hard landing and said the Federal Reserve's interest rate cuts will not be enough to prevent this from happening.
In an interview with Bloomberg this month, he pointed out that just as the impact of the Federal Reserve's interest rate hikes on the economic slowdown was less than expected, he believed that interest rate cuts would not have much of an impact on stimulating the economy. In addition, 10-year Treasury yields, a benchmark for various borrowing costs, are already lower than 2-year Treasury yields, leaving less room for further downside, especially as rising deficits and inflation add to upward pressure.
"Most economic activity is going to be more sensitive to the 5-year, 10-year yield. It's really not about the overnight policy rate.
So there does exist the question of how much lower policy rates can stimulate the economy. "
