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

A recent Reuters poll of economists overwhelmingly anticipates the Federal Reserve will implement a 25 basis point interest rate cut on September 17, the first such reduction this year. This expected easing is primarily driven by recent labor market softness, which is overshadowing persistent inflation risks, with inflation projected to remain above the Fed's 2% target until at least 2027. Markets have fully priced in this September cut and now anticipate three reductions this year, with further easing expected into 2025 amidst a challenging policymaking environment and potential for internal dissent among Fed members.

Analysis

A consensus has solidified among economists for the Federal Reserve to initiate a 25 basis point rate cut on September 17, with 105 of 107 analysts in a Reuters poll anticipating this move. This dovish pivot is primarily driven by four months of evidence pointing to a persistent slowdown in the U.S. labor market, which is now overshadowing concerns about inflation remaining above the Fed's 2% target until at least 2027. Financial markets have fully priced in the September reduction and now anticipate a total of three cuts this year. The policymaking environment remains complex, with potential for dissent from board members who previously opposed holding rates steady. While the median forecast points to a cumulative 50 basis points of cuts by the end of 2025, a growing minority of economists (37%, up from 22% in August) now expect 75 basis points of easing. This reflects a significant risk highlighted by a majority of respondents, who see either surging inflation or a mix of rising unemployment and high inflation as a more likely scenario over the next year, pointing to a potential for policy error.

Key Decisions for Investors

• Given the strong consensus for an imminent rate cut cycle, investors should assess positioning in rate-sensitive sectors such as technology and growth stocks, which tend to benefit from lower borrowing costs.
• The conflicting signals between a softening labor market and persistent inflation create a risk of policy error, making it prudent to monitor inflation data closely and consider maintaining hedges against unexpected inflation surges.
• Upcoming labor market reports will be critical market-moving catalysts, and any data deviating from the 'softening' narrative could significantly alter the Fed's projected rate path and introduce volatility.
• Fixed-income investors may consider extending duration to lock in current yields ahead of expected future cuts, but should remain cautious as persistent inflation could limit the extent of a bond market rally.