Fed Chair Powell has given a clear signal for a rate cut in September. However, he has not given any hint about the size of the September cut, or the pace and size of the rate cuts after September, Rabobank’s macro strategists note.

Expect only 25 bps in September

“We expect the labor market to deteriorate further in the remainder of the year, leading to four consecutive rate cuts of 25 bps each in the upcoming four scheduled FOMC meetings: September, November, December and January. There is a substantial risk of a 50 bps cut at one of these meetings, including the September meeting, although it is not our baseline.”

“Given the data so far, we expect only 25 bps in September. However, it is a close call. The lack of guidance from Powell could indicate that the FOMC has not reached a consensus yet. What’s more, Tuesday’s retail sales could still alter the calculus. However, last week’s CPI continues to point at persistence in core inflation.”

“What happens after January will to a large extent depend on the economic policies of the next administration. A Trump victory would likely lead to a universal tariff and a rebound in inflation that should stop the Fed’s cutting cycle in its tracks. A Harris victory would likely be less inflationary and give scope for additional rate cuts in 2025.”