Prepare for a series of rate cuts from the Federal Reserve that will begin in a few months and continue into the following summer, as per analysts at Citi Research.
In a recent note, the bank pointed to fresh indications of an economic slowdown as the basis for their belief that the Fed will reduce rates by 25 basis points on eight occasions, starting in September and extending until July 2025.
This will result in a significant 200 basis point decrease in the benchmark rate, bringing it down from its current range of 5.25%-5.5% to 3.25%-3.5%, where it will remain for the remainder of 2025, according to the note.
Citi analysts, led by chief U.S. economist Andrew Hollenhorst, noted that the economy has cooled down from its previous rapid pace in 2023, with inflation slowing down once again after some unexpected stubbornness.
However, the Institute for Supply Management’s service-sector gauge unexpectedly fell into negative territory and the monthly jobs report revealed a rise in unemployment to 4.1%. This has increased the risk of a more severe economic slowdown and a faster pace of interest rate cuts, according to experts.
Taking into account this data, as well as the dovish comments made by Fed Chair Jerome Powell on Tuesday, it is highly likely that the first rate cut will occur in September.
Citi, in its analysis, predicts that if economic activity continues to weaken, rate cuts will be implemented at each of the subsequent seven Fed meetings.
The report also highlighted other signs of weakness in the jobs report. Although the headline payroll gain of 206,000 seems strong, previous months were revised downward. Additionally, there was a decline of 49,000 temporary services jobs in June, which Citi describes as a typical decline seen during recessions as employers start reducing labor with the least strongly attached workers.
According to the report, the payroll data may be biased towards the positive side, making the unemployment rate a more crucial indicator. Citi also mentioned the “Sahm Rule” recession indicator, suggesting that it could be activated in August if the unemployment rate continues to increase at its current rate.
Hollenhorst has taken a relatively contrary stance this year by maintaining a more pessimistic outlook on the economy, even when the majority of Wall Street shifted towards a softer landing prediction.
In May, he reiterated his warning that the US is heading towards a severe economic downturn and that the rate cuts implemented by the Federal Reserve would not be sufficient to prevent it. He had previously made a similar forecast in February, despite the release of impressive jobs reports.
During an interview with Bloomberg TV on Wednesday, Hollenhorst highlighted that a severe recession would likely lead to a consensus among politicians to increase government spending in order to stimulate the economy, even if it means ignoring concerns about the growing deficit. However, he noted that a less severe recession may not result in such a consensus.
Hollenhorst also pointed out that, contrary to expectations, rate cuts by the Federal Reserve have not had as much of a stimulating effect on the economy as anticipated. He further explained that 10-year bond yields, which are used as benchmarks for various borrowing costs, are already lower than 2-year yields. This leaves less room for further downside, especially considering the upward pressure from rising deficits and inflation.
According to Hollenhorst, the effectiveness of lower policy rates in stimulating economic activity is more dependent on the 5-year and 10-year yields, rather than the overnight policy rate. He emphasized that there are doubts about how much the stimulative effect of lower policy rates can be transmitted.
This article was initially published on Fortune.com.