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Get ready for a bonanza of rate cuts from the Federal Reserve that starts in a few months and extends all the way into next summer, according to analysts at Citi Research.<\/p>\n
In a note on Friday, the bank cited fresh signs of a slowing economy for its view that the Fed will trim rates by 25 basis points eight times, starting in September and extending to July 2025.<\/p>\n
That will lower the benchmark rate by a whopping 200 basis points, or from 5.25%-5.5% now to 3.25%-3.5%, where they will remain for the rest of 2025, the note said.<\/p>\n
The economy has cooled off from its \u201cheady\u201d pace in 2023 with inflation resuming its slowdown after some unexpected stickiness, said Citi analysts led by chief U.S. economist Andrew Hollenhorst. <\/p>\n
But the Institute for Supply Management\u2019s service-sector gauge, which abruptly reversed into negative territory, and the monthly jobs report, which showed unemployment rising to 4.1%, have raised the risk of a sharper weakening of economic activity and a faster pace of rate cuts, they added.<\/p>\n
The data along with dovish comments from Fed Chair Jerome Powell on Tuesday suggest the first rate cut will very likely come in September. <\/p>\n
\u201cA continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case,\u201d Citi predicted.<\/p>\n
The note also pointed to other signs of weakness in the jobs report. While the headline payroll gain of 206,000 appears solid, prior months were revised down. And June saw a decline of 49,000 temporary services\u00a0jobs, with Citi calling it \u201cthe type of decline that is typically seen around recessions\u00a0as employers begin reducing labor with the least strongly attached workers.\u201d<\/p>\n
Payroll data are also likely skewed to the upside, leaving the unemployment rate, which is derived from a separate survey, as the more important metric, it said. And on that front, Citi pointed to the \u201cSahm Rule\u201d recession indicator<\/a> and said it could be triggered in August if unemployment continues to rise at its current pace.<\/p>\n Hollenhorst has been a relative contrarian this year by maintaining a dimmer view on the economy, even as the Wall Street consensus shifted to a soft landing.<\/p>\n In May, he doubled down on his warning that the U.S. is headed for a hard landing<\/a> and that Fed rate cuts wouldn\u2019t be enough to prevent it. That followed a similar forecast in February, even amid blowout jobs reports.<\/p>\n In an interview with Bloomberg TV on Wednesday<\/a>, Hollenhorst noted that a sharp recession would likely produce enough political consensus for more government spending to stimulate the economy, overcoming concerns about the massive deficit. But a more mild recession may not result in such a consensus, he added.<\/p>\n He also pointed out that just as Fed rate hikes slowed the economy less than anticipated, rate cuts have not stimulate as much. In addition, 10-year bond yields, which serve as benchmarks for a wide range of borrowing costs, are already below 2-year yields, leaving less room for further downside, especially as rising deficits and inflation add upward pressure. <\/p>\n \u201cMost economic activity is going to be more responsive to a 5-year yield, the 10-year yield. It\u2019s not really about the overnight policy rate,\u201d Hollenhorst explained. \u201cSo there really are questions about how much can you transmit that stimulative effect of lower policy rates.\u201d <\/p>\n<\/div>\nSubscribe to the CEO Daily newsletter to get global CEO perspectives on the biggest stories in business. Sign up for free<\/a>.<\/div>\n