Two rate cuts at one Federal Reserve meeting?
That’s a possibility, according to economists at Morgan Stanley.
“The risk of the Fed moving as early as July and by as much as 50 basis point cannot be ruled out,” the analysts, led by chief U.S. economist Ellen Zentner, wrote in a Friday note to clients.
When the Fed raises or lowers short-term interest rates, it traditionally does so in 25bp increments.
“Fed policymakers will have to weigh these downside risks to the labor market at their June meeting in the context of market expectations that increasingly favor near term rate cuts,” the economists wrote, referring to the weaker-than-expected May jobs report released on Friday. “After this morning’s data, the market moved to price in a 25% chance of a 25bp rate cut in June and nearly a 100% chance of a 25bp cut in July.”
Only 75,000 jobs were added to the economy during the month, according to the Bureau of Labor Statistics, missing estimates of 180,000.
Still, there are some analysts that remain skeptical of a June rate cut triggered by just one disappointing jobs report.
“On balance, we still think Fed officials will want to see evidence of more sustained weakness before taking action, but we are increasingly convinced that the Fed will begin cutting interest rates later this year,” wrote analysts from Capital Economics in a note to clients on Friday.
The three-month average of job growth stands at roughly double the headline job print for May at 151,000.
While JPMorgan chief U.S. economist Michael Feroli expects various Federal Reserve officials to raise the prospect of a June rate cut, pulling the trigger is a much different story.
“We think the most likely outcome of that debate is to adopt a watchful waiting posture. We still look for cuts in September and December, though risks are skewing toward sooner and more,” he wrote in a Friday note.
Editor’s Note: This article has been updated to differentiate between Morgan Stanley's rate cut expectations and the market's rate cut expectations.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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