A string of weaker-than-expected economic data, including an unexpected rise in the unemployment rate, a closely watched indicator of a recession, sent markets plummeting.
Investors are judging bad economic news to be bad news for markets as the trajectory of economic growth becomes clearer. Economists are largely in agreement that the risk that the Federal Reserve has kept interest rates too high has increased, stifling economic growth.
But there is no consensus on how quickly the Fed should adjust policy to address this risk. As of Monday afternoon, markets were pricing in five or more rate cuts by the end of the Fed’s January 2025 meeting, about two more cuts than markets were pricing in on July 31, less than a week ago.
This price is consistent with the belief of economists that the Fed is “offside” and that a policy shift is needed as inflation falls and current interest rates become tighter despite the Fed taking no action.
“The stance of monetary policy is currently fairly containment,” Wells Fargo chief economist Jay Bryson wrote in a research note on Monday, calling for a 100-basis-point rate cut at the Fed’s next two meetings. “In our view, the FOMC needs to quickly return to a ‘neutral’ policy stance or we risk a vicious cycle in which labor market weakness leads to weak spending, which in turn leads to further labor market weakness.”
Deutsche Bank’s economics team is sticking to its forecast for three rate cuts this year but takes a different view: Brett Ryan, senior US economist, told Yahoo Finance that the recent market moves resembled a “struggle” between market participants and may have been overoptimism rather than a precise recalibration.
Ryan added that it will be important to see more data to explain whether the weak July jobs report is an anomaly caused by a temporary issue like Hurricane Beryl, or confirmation of the beginning of a trend.
“You don’t want to overreact to one piece of data,” Ryan said. “The risks are certainly rising and the Fed will likely start to cut rates more aggressively, but we’re not there yet.”