JPMorgan, Citigroup scrap July rate cut forecasts for the US

JPMorgan and Citigroup have thrown out their predictions for a July rate cut. Last Friday’s jobs report was the catalyst for this change. Now, most sell-side economists and other professional Fed watchers expect one or two rate cuts later this year, in either September or December.

Also Read: Central banks have no choice but to delay rate cuts

Nick Timiraos from the Wall Street Journal reported, “JPM and Citi scrapped their calls for a July rate cut after last Friday’s jobs report. Most sell-side economists and other professional Fed watchers now anticipate one or two rate cuts this year in either September or December.”

Major banks had hopes of rate cuts

Most other banks gave up on the idea of Fed rate cuts before September weeks, if not months, ago. However, recent data shows that weakness in job openings and private-sector job creation has changed market expectations. Now, the odds favor Fed rate cuts starting as early as September, not waiting until December.

Citigroup’s July rate cut forecast was the first of four expected this year. Andrew Hollenhorst, the bank’s chief US economist, mentioned last Wednesday that this forecast depended on softer labor market data. Hollenhorst’s team predicted a 140,000 nonfarm payroll increase and an unemployment rate of 4%, up from 3.9%.

The Fed’s rate-setting committee is set to meet later this week for the last time before July. Regardless of what the May jobs data reveals, the Fed will unlikely signal any intention for a July rate cut. Hollenhorst noted, “Fed Chair Jerome Powell will explicitly keep all meetings on the table for a potential rate cut. He might also emphasize that the committee is watching data and will make decisions on a meeting-by-meeting basis.”

Also Read: Jerome Powell says interest rate cuts will do nothing for U.S. economy

JPMorgan economists initially held on to their July rate-cut prediction based on April inflation readings. Michael Feroli, JPMorgan’s chief US economist, and his colleagues stated in a May 15 note, “We probably need to see some further cooling in labor-market activity for that to play out.” JPMorgan had estimated payrolls increased by 150,000 in May.

Strong hiring defies predictions

The hiring surge in the US last month defied expectations of a slowdown and raised questions about the timing of future rate cuts. The US Labor Department reported that employers added 272,000 jobs in May, far exceeding the anticipated 185,000 new roles. This unexpected increase occurred despite the highest borrowing costs in over 20 years, which many analysts had expected to weigh on the economy.

According to the latest data on Fed rate cuts, many major banks have varied predictions. For instance, Bank of America, BNP Paribas, and RBC expect the first cut in December, with cuts of 25 basis points each. Citigroup and Morgan Stanley predict a significant cut of 75 basis points in September. Meanwhile, HSBC and Barclays forecast more modest cuts of 25 basis points in September.

The US central bank has aggressively raised interest rates since 2022 to combat inflation, which measures the pace of price increases. The Fed has pointed to strong employment as evidence that the economy can handle current rates. However, the latest job figures contradict other data, suggesting signs of softening, which may soon undermine arguments for cutting borrowing costs.

Cryptopolitan reporting by Jai Hamid