A slew of weaker-than-expected economic data, including a surprise uptick in the unemployment rate triggering a closely watched recession indicator, has sent markets into a tailspin.
Investors have now decided that bad economic news is bad news for markets as the growth trajectory comes into closer focus. Economists largely agree that the risks to the Federal Reserve holding interest rates too high and potentially stunting economic growth have risen.
But there isn’t consensus on how quickly and swiftly the Fed needs to adjust its policy to address this risk. As of Monday afternoon, markets are pricing in more than five interest rate cuts by the end of the Fed’s January 2025 meeting, roughly two more cuts than markets had priced less than a week ago on July 31.
The pricing aligns with economists who believe the Fed is “offside” and that a policy shift is needed as inflation falls and, subsequently, current interest rate levels become more restrictive despite no action from the Fed.
“The stance of monetary policy is quite restrictive at present,” Wells Fargo chief economist Jay Bryson wrote in a research note on Monday, calling for 100 basis points of cuts across the Fed’s next two meetings. “In our view, the FOMC needs to get back to a ‘neutral’ stance of policy quickly or else it risks a vicious circle of labor market weakness leading to sluggish spending, leading to further labor market weakness, etc.”
Deutsche Bank’s economics team, which is standing by its call for three interest rate cuts this year, sees it differently. Senior US economist Brett Ryan told Yahoo Finance the recent market action feels like a “scramble” among market participants that might’ve been too optimistic rather than an accurate recalibration.
Ryan added the key remains seeing further data to explain whether the weakness in the July jobs report was an aberration due to one-time issues like Hurricane Beryl or a confirmation that a trend is starting.
“You don’t want to overreact to one data point,” Ryan said. “So without question, the risks have risen, leaning toward the Fed starting off with a more aggressive pace of rate cuts, but we’re not there yet.”