Why a jumbo Fed rate cut in September would ‘come across as panicky’

Treasury Secretary Scott Bessent said Wednesday he wants drastically lower rates from the Federal Reserve. - MarketWatch photo illustration/Getty Images, iStockphoto

Investors have begun to see the possibility of the Federal Reserve delivering a jumbo rate cut in September of 50 basis points — just like the one delivered almost a year ago.

Helping nudge that view along was July’s ugly jobs report, as well as comments Wednesday from Treasury Secretary Scott Bessent, who said he sees a “very good chance” the Fed will opt for a rate cut of 50 basis points in September, during a Bloomberg TV interview.

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“I suspect we could have had rate cuts in June and July,” Bessent said, pointing to big revisions to jobs data for May and June, which showed far fewer jobs created than initially reported.

Bessent said recent payroll revisions also suggest rates remain too restrictive, while advocating for the Fed’s short-term policy rate to be slashed 150 basis points to 175 basis points.

“As soon as I saw that nonfarm payroll print, I thought 50 basis points of cuts could be on the table,” said Robert Tipp, chief investment strategist and global head of bonds at PGIM Fixed Income, noting the July report revised a full quarter of labor-market data lower.

Yet Tipp thinks the Fed could tread carefully, especially with Chair Jerome Powell gearing up to deliver his Jackson Hole speech next week at the annual central-bank economic summit in Wyoming. There’s also more economic data on tap before the Fed’s next meeting in September.

Powell may feel a need to signal a “hard turn of the wheel” when it comes to monetary policy at Jackson Hole, Tipp said, but he also wouldn’t want to spur a knee-jerk reaction in markets.

Read:Will Powell use Jackson Hole speech to push back on hopes for September rate cut?

This isn’t 2024

Investors have growing concerns that the labor market might be worse than it looks, especially with the ripple effects of President Donald Trump’s tariff fight still highly uncertain.

Sharp rate cuts could lead to froth in the stock market, with the S&P 500 index SPX and Nasdaq Composite Index COMP already scoring fresh record highs and the blue-chip Dow DJIA not far behind.

However, investors also have been wrestling with more data head-fakes and mixed recession signals since in the wake of the pandemic.

“The broader economy is still in good shape,” said Daniel Siluk, head of global short-duration and liquidity at Janus Henderson. He pointed to American corporations coming into the year with near record levels of profit margin, which should allow them some room to absorb higher tariff costs without being squeezed too much.

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“Fifty basis points [of cuts] would come across as panicky,” Siluk said of any potential Fed rate move in September. “Fifty was OK last year,” he said, noting the upper range of the U.S. central bank’s policy rate was still at 5.5%.

But with the Fed already cutting its policy rate by 100 basis points, or 1%, in 2024, its benchmark range has been sitting at a lower 4.25% to 4.5% level all year. Furthermore, the “neutral” rate, which aims to neither stimulate nor restrict the economy, might still be up for debate, but the Fed’s policy rate is closer to it now than 12 months ago, he said.

“The more aggressive path laid out by Secretary Bessent isn’t the baseline for markets,” said Gennadiy Goldberg, TD Securities head of U.S. rates strategy, noting the Treasury would want to finance U.S. debt at the most advantageous levels as possible.

“Rate cuts would do that,” Goldberg said, but that’s also why the U.S. central bank was set up as an independent agency from the Treasury Department.

What the odds say

The odds moved up Wednesday to about 94% for a Fed cut of 25 basis points in September, and nearly 6% chance of a cut of 50 basis points, according to the CME FedWatch tool. Traders favor another cut of 25 basis points at October’s meeting.

“I’m not surprised about what Bessent said this morning,” said George Catrambone, head of fixed income, Americas, at DWS, noting the weak July jobs report, this week’s mild inflation data and the Trump administration’s clear desire for lower rates.

Catrambone said that if the Fed were to opt for a jumbo rate cut, like last September’s, it would likely be talked about as a “catch-up” cut — and not an emergency response to the economy.

“Powell would need to signal this pretty strongly at Jackson Hole,” he said. “I don’t know if he will.”

Another thing to consider is that long-duration rates used to finance the U.S. economy moved up, not down, after the Fed cut rates by 1% in 2024.

The 10-year Treasury yield BX:TMUBMUSD10Y fell 5.5 basis points to about 4.24% on Wednesday, but that’s above its 3.85% level a year ago, according to FactSet.

“I think the market was looking for a hot print and didn’t get it,” said Bret Barker, co-head of global rates at TCW, in response to falling Treasury yields since Tuesday’s fairly tame consumer-price index report.

“For us, September is live for sure,” Barker said of possible Fed rate cuts. “But it depends on where the data comes in.”

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