US economic outlook: September 2024
On a knife-edge
The U.S. employment and inflation data have made it clear the FOMC will reduce the federal funds rate at its meeting on Sept. 17-18, the first reduction in the Federal Reserve's policy rate since March 2020. Nonfarm payrolls have increased by just 116K per month over the past three months, the slowest pace since the onset of the pandemic, and the underlying trends in the unemployment and under-employment rates continue to be upward.
On the inflation side of the Federal Reserve's dual mandate, the core PCE deflator has risen 2.6% over the past year and at just a 1.7% annualized pace over the past three months. Furthermore, we think price growth will continue to slow gradually in the months ahead.
The labor market is still expanding, and with it the U.S. economy is too, but the former is hanging on a knife-edge at present. If the labor market deteriorates further, the recent run of solid economic growth would be under threat. FOMC Chair Jerome Powell made clear in a recent speech at Jackson Hole that “we do not seek or welcome further cooling in labor market conditions.” In order to achieve that, we think the FOMC will need to move to a less-restrictive stance of monetary policy in a relatively short period of time.
The big question heading into next week's FOMC meeting is whether the Committee will adopt a standard-sized 25 bps move or a larger 50 bps cut. We expect a 25 bps reduction in the federal funds rate on Sept. 18 based on our sense of the FOMC's reaction function at this point in time. That said, it would not shock us if the Committee opted to move by 50 bps next week, and it is still our expectation that 50 bps cuts are coming at some point.
Our base case forecast looks for a 25 bps reduction in the federal funds rate at the September FOMC meeting followed by two 50 bps rate cuts at the November and December FOMC meetings. If realized, this would put the target range for the federal funds rate at 4.00%-4.25% at year-end. By most estimates, including ours and the FOMC's, this would still be above the “neutral rate” that separates restrictive from accommodative monetary policy. We believe that the 225 bps of cumulative monetary policy easing that we project over the next nine months or so will be enough to keep this economic expansion intact.
Author
Wells Fargo Research Team
Wells Fargo
