US Fed to cut rates in September and once more this year, say most economists: Reuters poll

A Reuters poll reveals that 61% of economists anticipate a 25 basis point Federal Reserve interest rate cut in September, the first this year, with over 60% expecting one or two reductions by year-end. This consensus is driven by rising concerns over the U.S. economy's health, including persistent inflation and weakening labor market data, though economists are generally more cautious than interest rate futures pricing. However, some analysts, notably Barclays, contend that market participants are excessively confident in a September cut, citing potential misinterpretations of the FOMC's labor market assessment and reaction function, underscoring ongoing uncertainty in the outlook.

Analysis

A recent Reuters poll indicates a growing consensus among economists for a near-term Federal Reserve policy pivot, with a 61% majority now forecasting a 25 basis point interest rate cut in September. This expectation is underpinned by mounting concerns over U.S. economic health, specifically citing recent downward revisions to hiring figures that suggest a weakening labor market, and persistent inflation pressures exacerbated by tariffs. However, significant divergence and uncertainty persist. Economists' outlook remains more conservative than that of interest rate futures traders, who have priced in a September cut with near-certainty. Furthermore, dissenting views, such as those from Barclays, argue that market participants are "excessively confident" and may be misinterpreting the FOMC's assessment of labor conditions. The situation is compounded by internal divergence within the FOMC, political pressure on Fed Chair Powell, and a general reliance on forthcoming data. Key upcoming catalysts include the next round of inflation and jobs reports, as well as Powell's speech at the Jackson Hole conference, which could either validate or challenge the current rate cut expectations. While most economists view the inflationary impact of tariffs as temporary, inflation forecasts remain above the Fed's 2% target through 2027, and there is no consensus on the federal funds rate by the end of 2025, highlighting a highly fluid and data-dependent policy environment.

Key Decisions for Investors

• Given the majority expectation for a September rate cut, investors should evaluate exposure to rate-sensitive sectors, but remain cautious of the overconfidence noted in the futures market.
• Monitor upcoming U.S. employment and inflation data with heightened vigilance, as these releases are identified as primary catalysts that could either solidify or reverse the Fed's course, creating potential for significant market volatility.
• Given the noted divergence among economists and within the FOMC, it is prudent to consider hedging strategies against a potential 'no-cut' scenario, as a decision to hold rates could trigger a sharp repricing in fixed income and equity markets.