Why some top Wall Street forecasters say don't bet on rate cuts this year

Business Insider

5 hours ago

After a dismal July jobs report, investors began to bet that the Federal Reserve would finally be willing to lower interest rates at its September meeting.
But top economists at Morgan Stanley and Bank of America say not so fast.
Markets are pricing in an 87.8% chance of a 25-basis-point cut in September, according to the CME FedWatch Tool. At the end of July, those odds were 37.6%.
The shift has come after weak labor market data caught investors off guard; according to the Bureau of Labor Statistics, the US economy added 73,000 in July, well below consensus expectations. But June and May job additions were jointly revised down by 258,000, creating a three-month average of 35,000, consistent with recessionary levels, said Jose Torres, a senior economist at Interactive Brokers. The report prompted President Trump to fire BLS director Erika McEntarfer.
Stocks plunged on the lackluster numbers last Friday, as investors worried the US economy was headed toward a recession.
"Powell is going to regret holding rates steady this week," said Jamie Cox, managing partner for Harris Financial Group, in an August 1 email. "September is a lock for a rate cut and it might even be a 50-basis-point move to make up the lost time."
But Michael Gapen, the chief US economist at Morgan Stanley, and Aditya Bhave, a senior economist at Bank of America, aren't convinced.
In an August 1 note, Gapen said that rate cuts are still unlikely until 2026 because the labor market remains in good shape. While that sounds counterintuitive given the meager payroll additions, he said to look at the unemployment rate, which remained steady at a historically low 4.2%. It showed that even though job gains were slowing, so was labor force participation.
"When asked about how he would interpret a slowdown in payrolls, Powell said, 'the demand for workers is slowing, but so is the supply...so it [the labor market] is in balance...oddly enough.' Today's nonfarm payrolls will put that simplification to the test," Gapen wrote. "Payrolls were weaker than we and the market expected and backward revisions point to a softer labor market than we had known. And yet, the unemployment rate is essentially where it has been for the past year."
Inflation is still above the Fed's target of 2%, he said, and Powell reiterated his relatively hawkish approach at his July 30 FOMC meeting press conference.
On Monday, Bhave wrote that BofA is also staying with its call for no cuts the rest of this year. That's partly due to tariffs and their potential inflationary impact.
"The Fed is still missing by a lot more on inflation than its labor mandate," Bhave said. "If it were to cut in September, it would be putting a lot of faith in a forecast of labor market deterioration, with no evidence that inflation has peaked."
Spending data from BofA clients, which portrayed a robust consumer in July, back up Bhave's worries about inflation.
"The danger of premature cuts is underscored by evidence that the economy rebounded in July. Aggregated BAC debit and credit card spending accelerated last month, we saw record Prime Day spending and auto sales and air travel surged," he wrote. "A July rebound would be in line with the idea that trade policy uncertainty is receding after having peaked in 2Q."