Investors are beginning to realize that the Federal Reserve may implement a super cut of up to 50 basis points in September—just like nearly a year ago.
Driving this expectation is the dismal employment report for July, along with Treasury Secretary Bessent's remarks on Wednesday. In an interview with Bloomberg TV, he stated that the Fed is "extremely likely" to choose a 50 basis point cut in September.
"If it weren't for data revisions, rate cuts should have happened in June and July," Bessent pointed out, as the substantial downward revision of employment data for May and June shows that new jobs were far below initial reports.
He further stated that recent employment growth indicates interest rates are still too tight, advocating for a drastic cut of 150 to 175 basis points in the Fed's short-term policy rate.
PGIM Fixed Income Chief Investment Strategist Robert Tipp bluntly stated: "Once the July non-farm data was released, a 50 basis point cut was on the table." However, he believes the Fed may act cautiously, especially since Powell will give a speech at the Jackson Hole central bank meeting next week (August 21 to August 23), and there are more economic data to be released before the September meeting.
Tipp stated: "Powell may need to signal a policy 'sharp turn,' but he is reluctant to trigger a knee-jerk market reaction."
Investors are increasingly worried that the labor market is worse than it appears, especially given the high uncertainty surrounding the chain effects of Trump's reciprocal tariff conflicts. Aggressive rate cuts could fuel a stock market bubble—as both the S&P 500 and Nasdaq indices have hit new highs, with the Dow Jones following closely behind.
However, post-pandemic, economic data showing 'false movements' and contradictory recession signals are frequent. Daniel Siluk, Global Short-Term Strategy Head at Janus Henderson, believes: "The overall economy remains robust." Corporate profit margins are close to historical peaks at the beginning of the year, able to partially absorb tariff costs. However, regarding a rate cut in September, he warned: "A 50 basis point cut would seem panicky—last year it was feasible because the rate ceiling reached 5.5%, whereas the benchmark rate has now dropped to 4.25%-4.5%, and the neutrality rate debate remains unresolved."
TD Securities US Interest Rate Strategist Gennadiy Goldberg said: "Bessent's aggressive path is not the market baseline—Treasury certainly wants to finance at the optimal cost, but the independence of the Federal Reserve stems from this."
According to the CME FedWatch Tool, the probability of a 25 basis point cut by the Fed in September has risen to 94%, and the probability of a 50 basis point cut is nearly 6%. Expectations for another 25 basis point cut in October are also heating up. DWS Americas Fixed Income Head George Catrambone stated that if the Fed mimics last September's significant rate cut, it should be viewed as a 'compensatory cut' rather than an economic emergency aid.
Tranbern stated: "Powell needs to send a strong signal at Jackson Hole—but I doubt he will do so."
Another key contradiction is that after a 1% rate cut by the Fed in 2024, long-term financing rates in the US actually rise. Although the 10-year Treasury yield fell to 4.24% on Wednesday, it is still higher than a year ago at 3.85%.
TCW Global Interest Rate Co-Head Bret Barker said: "The market expected hot data but fell short; a rate cut in September is indeed possible, but it all depends on the direction of the data."