"No rate cut in July, significant rate cut in September"? Market speculation: Does the Fed have a "repeat of last year"?

Original author: Bao Yilong, Wall Street Journal

Reprint: Luke, Mars Finance

A surprisingly weak employment report is prompting discussions in the market about whether last year's script of "holding steady in July and a significant rate cut in September" will be replayed. Nick Timiraos, known as the "new Fed whisperer," and renowned economist El-Erian have both pointed out that the current scenario feels "familiar."

Just after the Federal Reserve announced to keep interest rates unchanged this week, the non-farm payroll data for July released on Friday showed that the U.S. labor market is cooling at an alarming pace. The data not only fell far short of expectations, but the significant downward revisions to employment figures for the previous two months revealed the underlying weakness of the economy, putting the Federal Reserve's previous wait-and-see stance to the test.

In the face of this weak employment report, BlackRock's Chief Investment Officer for Global Fixed Income, Rick Rieder, stated bluntly:

Today's report provides the evidence needed for the Federal Reserve's adjustment of interest rates in September, so the only question is how much the adjustment will be.

According to data from the CME, the probability of the Federal Reserve lowering interest rates at the September meeting soared from less than 40% on Thursday to nearly 90%.

The probability of a 25 basis point rate cut in September is as high as 89.6%.

History repeating itself? The market bets on the Fed's "rescue" rate cut.

The sudden cooling of the job market immediately evokes associations with the Federal Reserve's policy trajectory from last summer.

At that time, the Federal Reserve also chose not to cut interest rates at the July meeting, but the weak employment report released two days later changed the situation. Ultimately, officials made a "correction" by cutting rates by 50 basis points (more than the usual 25 basis points) at the September meeting.

Before the Federal Reserve's interest rate decision in July, renowned economist El-Erian posted a forecast of the potential interest rate path of the Federal Reserve:

What is the likelihood that the Federal Reserve will fully replicate last year's pattern? Specifically, the Federal Reserve maintained interest rates in July and then significantly cut rates in September, even though the economic conditions appeared unchanged during this period.

Previously, according to Wall Street Journal, well-known financial journalist Nick Timiraos also stated that the current situation may give Federal Reserve officials a sense of "déjà vu."

However, Timiraos pointed out a key difference between the two: last year, U.S. inflation was in a sustained decline; whereas this year, due to a series of broad tariffs imposed by the Trump administration since spring, Federal Reserve officials are instead concerned that inflationary pressures may rise.

Therefore, Timiraos emphasized that the key issue facing the Federal Reserve is whether the fundamentals of the U.S. economy are truly deteriorating, or if the recent slowdown is merely a temporary phenomenon caused by the lagging effects of certain policies.

But Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, stated in a report to clients on Friday afternoon:

If the idle state of the labor market worsens, or if new employment continues to be below 100,000, it is expected that the Federal Reserve will begin to cut interest rates, and a 50 basis point rate cut in September is likely.

It is worth noting that although Rieder has suggested the possibility of a significant rate cut of 50 basis points, the current futures market prices indicate that traders believe the probability of such an event is zero.

Before the September meeting, decision-makers will also receive an employment report and two months of inflation data, which will jointly determine whether the Federal Reserve will choose to take a cautious wait-and-see approach or respond to the changing economic outlook with a decisive action like last year.