FED, Certain Rate Cut on September 17

We recently provided an analysis on the possible courses of action by the Federal Reserve (FED) starting from Wednesday, September 17, and until the end of the year.

Three major figures were still due before the September 17 FED meeting: the NFP report, a PPI, and a CPI. The NFP report has been released and its message is unequivocal, making a 0.25% (25 bps) rate cut by the FED on Wednesday, September 17, almost certain.
Even better, the probability of a “jumbo FED cut” has risen to 10%, meaning a 50 bps (0.50%) rate cut.
How did we get here?

1) Four consecutive disappointing NFP reports and an unemployment rate near the FED’s alert threshold

The U.S. jobs report (NFP), published on Friday, September 5, is weak overall:
Unemployment rises to 4.3% of the U.S. labor force, while the FED’s macroeconomic alert threshold is 4.4%
In absolute terms, the number of unemployed has reached a record since early 2021
Four consecutive months with fewer than 100,000 net job creations, unseen since the 2020 pandemic crisis
As for wage growth, it continues its downward trend, which should eventually allow inflation to decline again (once tariffs are factored in)


2) For the FED, the specter of stagflation looms — the worst macroeconomic scenario for a central bank

Will Jerome Powell’s FED and the FOMC be able to lower the federal funds rate starting from Wednesday, September 17? The answer is yes.
The accelerating deterioration of the U.S. labor market significantly raises the probability of a U.S. recession. The upcoming rate cut by the FED could even be considered too late, since rising unemployment generally signals that the economy has already been slowing sharply for many months.
U.S. core inflation remains around 3% due to tariffs, but the state of employment makes a more neutral federal funds rate necessary. Hence, the probability of FED action on September 17 is close to 100%.


3) This week, PPI and CPI inflation are the dominant fundamentals

In conclusion, the probability of FED action could still evolve this week with the updates of U.S. inflation via PPI and CPI.




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