Strong jobs data push JPMorgan, Citi to scrap July rate-cut bets

Economists at Citigroup Inc. and JPMorgan Chase & Co., some of the last holdouts predicting a Federal Reserve interest-rate cut in July, have relented.

After Friday’s release of stronger-than-anticipated May employment data, Citigroup now sees US policymakers making their first move in September, while JPMorgan looks for no change until November. 

“We are shifting our base case for the first rate cut from July to September,” Andrew Hollenhorst, Citigroup’s chief US economist, said in a report Friday. While the labor market and US economy both appear to be slowing, “surprisingly strong job growth” last month will probably stay the Fed’s hand while “waiting for more data on slower activity and inflation.”

JPMorgan’s chief US economist Michael Feroli, also in a Friday report, said “the recent momentum in job growth” suggests that the “broader” labor-market weakening the Fed has said could warrant a rate cut may take more than three months to materialize.  

Citi’s new forecast is for three quarter-point rate cuts this year — in September, November and December. Previously the bank forecast four, with one at each Fed policy meeting from July to December. JPMorgan’s changed from three cuts this year to just one, followed by one per quarter next year.

Yields surged and derivatives markets priced in a smaller total amount of Fed rate cuts this year after the employment report showed that job creation and wage growth exceeded economist estimates. The cumulative amount of easing expected by traders dropped by about 10 basis points to 38 basis points. 

Among other major Wall Street banks, at least six were forecasting a Fed rate cut in September as of this week, and at least four looked for an initial cut in December.

Wall Street has been caught off guard all year by the resilience of the US economy after 11 Fed rate hikes from March 2022 to July 2023 brought the target range for the federal funds rate to 5.25% to 5.5%. At the start of the year, derivatives markets priced in at least six quarter-point rate cuts by December, and several banks had forecasts for at least five.

Those outlooks were gradually scaled back, particularly after progress toward lower inflation stalled. 

Fed policymakers, whose median end-2024 projection for the fed funds rate was 4.625% in December and March, responded with comments emphasizing the need for greater certainty on the inflation trend before cutting rates. Fed Governor Christopher Waller, for example, said on May 21 “several more” months of good inflation data were needed.