JPMorgan’s top economist, Michael Feroli, believes the Federal Reserve should cut interest rates by a half point this month and this has potential to increase investment inflow to emerging markets including Nigeria.
Traders are pricing in a 39 percent chance that the Fed’s target range for the federal funds rate will be lowered by a half percentage point, per the CME FedWatch Tool.
Feroli’s remarks come as August saw the weakest private payrolls growth in more than three-and-a-half years. The Federal Reserve should cut interest rates by 50 basis points at its September meeting, according to JPMorgan’s Michael Feroli.
“We think there’s a good case that they should get back to neutral as soon as possible,” the firm’s chief U.S. economist told CNBC’s “Squawk on the Street” on Thursday, adding that the high point of the central bank’s neutral policy setting is around four percent, or 150 basis points below where it is currently. “We think there’s a good case for hurrying up in their pace of rate cuts.
According to the CME FedWatch Tool, traders are pricing in a 39 percent chance that the Fed’s target range for the federal funds rate will be lowered by a half percentage point to 4.75 percent to five percent from the current 5.25 percent to 5.50 percent. A quarter-percentage-point reduction to a range of five percent to 5.25 percent shows odds of about 61 percent.
“If you wait until inflation is already back to two percent, you’ve probably waited too long,” Feroli also said. “While inflation is still a little above target, unemployment is probably getting a little above what they think is consistent with full employment. Right now, you have risks to both employment and inflation and you can always reverse course if it turns out that one of those risks is developing.”
His comments come as August marked the weakest month for private payrolls growth since January 2021. This follows the unemployment rate inching higher to 4.3 percent in July, triggering a recession indicator known as the Sahm Rule.
Still, Feroli said he does not believe the economy is “unraveling.” “If the economy were collapsing, I think you’d have an argument for going more than 50 at the next FOMC meeting,” the economist continued.
The Fed will make its decision about where rates are headed from here on September 17-18.
Also commenting, the Financial Derivatives Company (FDC) Limited said the US Fed will cut rates, which will likely encourage foreign investment inflows to emerging and developing markets, including Nigeria.
It added that increased capital inflows and a surprise Dutch auction will help stabilise the naira which weakened to N1,673/$.
The Jackson Hole meeting has set the stage for a potential shift in U.S. monetary policy. During the Jackson Hole meeting the Fed chairman signalled a policy rate cut. However, the timing and pace of rate cuts depend on incoming data, the evolving outlook and the balance of risks, the FDC stated.
FDC observed that the upside risks to inflation in the U.S. have diminished, but the downside risks to employment are still increasing.
The US Federal Reserve is expected to cut its benchmark rate for the first time in more than four years in September.
Analysts believe that a further two cuts could be implemented before year-end, even as expectations of monetary easing in the U.S. have started to weaken the dollar, although this depreciation is expected to be limited.
Major central banks including the European Central Bank (ECB) and the Bank of England (BoE) have reduced policy rates in June and August respectively. Interest-rate cuts in the US from September will offer additional support and end-2024 forecast is N1,388.6/$1
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