September Fed rate cut a done deal, at least one more to follow by year-end: Reuters poll

A Reuters poll of 107 economists overwhelmingly predicts the Federal Reserve will cut its key interest rate by 25 basis points to 4.00%-4.25% on September 17, driven by labor market softness despite inflation risks. This move, now fully priced in by markets which anticipate three total reductions this year, reflects a shift in Fed policy focus towards supporting employment given stalling job growth. Further cuts are expected, with most economists forecasting another reduction next quarter and significant easing through 2025, even as inflation is projected to remain above target.

Analysis

A strong consensus has formed for a 25 basis point Federal Reserve rate cut to a 4.00%-4.25% range on September 17, a view held by 105 of 107 economists in a recent Reuters poll. This dovish shift is primarily driven by increasing softness in the labor market, including stalling job growth and downward data revisions, which now overshadows persistent inflation risks. Markets have not only fully priced in this cut but have also escalated expectations to three total reductions this year, a notable increase from the two anticipated just weeks prior. The forward-looking outlook is also decidedly accommodative, with a majority of economists forecasting another cut next quarter and a cumulative 50 basis points of easing by the end of 2025. However, this policy direction is fraught with tension, as inflation is projected to remain above the Fed's 2% target until at least 2027, creating what Bank of America terms a "difficult policymaking environment" and elevating the risk of a policy error. This internal conflict is mirrored by the potential for increased dissents among Fed governors, adding a layer of uncertainty to the central bank's policy trajectory.

Key Decisions for Investors

• With a 25 basis point cut fully priced in, investors should focus on the Fed's forward guidance and the 'dot plot' for signals on the pace of future easing, as any surprise here will be the primary market-moving catalyst.
• Monitor for any increase in dissenting votes at the upcoming meeting, as a fractured board could signal heightened policy uncertainty and introduce volatility, particularly if the Fed deviates from the consensus 25 bps cut.
• Consider strategies that could benefit from a steepening yield curve, as the Fed appears set to cut short-term rates due to labor weakness even while long-term inflation is expected to remain firm above the 2% target.
• Given the growing expectation for further cuts through 2025, re-evaluate exposure to rate-sensitive sectors and fixed-income assets, while remaining mindful that persistent inflation could cap long-duration gains.