The Fed has been 'shaken' from its path by a softening labor market and will deliver steeper rate cuts as a result, JPMorgan says
The Fed is shifting from its gradualist stance on rate cuts amid uncertain labor-market data, JPMorgan says.
While the uncertainty makes rate cuts clear in the near term, it widens possibilities for next year.
JPMorgan expects 100 basis points of rate cuts by the end of the year.
The Federal Reserve is being forced to shift from its gradualist stance on rate cuts by the weakening of the US labor market, JPMorgan says.
Labor demand has softened, unemployment has risen, and supply has increased alongside gains in productivity.
That makes for an "odd combination of rising concerns about a US slide into recession alongside financial market optimism about the future path of business sector performance," JPMorgan said in a note on Tuesday.
The bank said that as a result of that rising uncertainty, the Fed seemed to be changing course, shifting from a gradualist attitude toward a fear of cutting interest rates too late.
At the Fed's Jackson Hole conference last week, its chair, Jerome Powell, gave a clear indication that the Fed plans to cut rates next month.
"The time has come for policy to adjust," he said. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
That confidence breaks from typically reserved commentary from the Fed and Powell, who previously reiterated the need for more data on inflation and unemployment before any decisions on rate cuts could be made.
Powell's speech confirmed a "shift in risk bias has taken place and that the Fed does not want to see labor conditions ease further," the JPMorgan analysts said.
"Last week's communications—from the FOMC minutes and Chair Powell's Jackson Hole speech—confirm that the Fed has been shaken and should deliver a roughly 100bp step-down in rates by the end of this year," the analysts added.
With just three meetings left this year, that would mean the Fed would abandon smaller moves of 25 basis points and enact a larger 50-basis-point cut in at least one of the remaining meetings.
That prediction is roughly in line with expectations, with odds strongly in favor of rate cuts between 75 and 125 basis points by the end of the Fed's December meeting, according to CME's FedWatch tool.
Investors are pricing in a 25-basis-point cut in September, with smaller odds for 50 basis points.
And while the present labor-market uncertainty makes rate cuts clear in the near future, it widens possibilities for next year, the JPMorgan analysts said.
Next year's rate-cut potential relies on how labor-market uncertainties are resolved, resulting in a "significant two-sided risk," the analysts said.
"There is an elevated risk that weak labor demand pushes the US economy towards recession, an outcome that would produce a cumulative Fed rate cut of at least 300bp. Through significant financial market transmission it would likely accelerate easing elsewhere," the JPMorgan note said.
"At the same time, a growth boost from an early dose of easing to offset risks that didn't materialize, could combine with positive supply side outcomes to generate reaccelerating labor demand next year," the analysts added.
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