Most economists think that the Federal Reserve will institute a modest cut to the benchmark interest rate rather than the jumbo bite demanded by some of Wall Street’s largest banks, according to a new survey.
Nearly four in five economists told Bloomberg News that they predict the Fed will slash rates by a quarter point, to a range of 5% to 5.25%, following its Sept. 17-18 meeting, while a small sliver said they thought a larger rate cut was in the offing.
Just one in 10 of those surveyed predicted that the central bank would implement an emergency rate cut before the meeting, which some Wall Street observers had called on Fed Chair Jerome Powell to make after markets nosedived earlier in the week.
The weak jobs report from last month coupled with disappointing earnings results from some of the nation’s top companies including Amazon and Alphabet fueled concerns on Wall Street that the economy was headed toward a recession.
That prompted investment banking giants such as Citigroup and JPMorgan Chase to demand that the Fed slash rates by a half-point.
The market even began pricing in interest rate reductions of 100 basis points by the end of the year.
But a stronger-than-anticipated jobless claims report on Thursday assuaged fears for the time being.
Jeremy Siegel, professor emeritus of finance at the prestigious Wharton School of the University of Pennsylvania, backed off his earlier call for a 75 basis-points emergency rate cut.
“I no longer certainly think it’s necessary,” Siegel told CNBC on Friday.
“But I want [Powell] to move down to 4% as fast as possible.”
Powell has stated that monetary policymakers want to see more evidence of cooling inflation before slashing rates.
The Fed has not budged from its target of 2% inflation. At the height of the inflation crisis, the consumer price index exceed 9% — its highest level in decades.
Since then, the rate of inflation has eased to 3% year-over-year in June. The figures from July will be announced on Wednesday.
In light of recent developments, a near consensus has emerged among economists that the Fed will opt for a more conservative 25 basis point cut next month, according to Bloomberg News.
Ryan Sweet, chief US economist at Oxford Economics, told Bloomberg News that calls for large cuts “are overdone and a knee-jerk reaction.”
“Historically, the Federal Open Market Committee has delivered intermeeting cuts and cuts larger than 25bps when there was a clear negative economic shock or when the data were worse than they have been so far,” he said.
While hiring has slowed down, Fed policymakers have stated they do not believe the US economy is on the verge of a recession — citing continued growth and a robust labor market.
