Does a Fed interest rate cutting bonanza lurk?

A market ginned up on aggressive rate cut expectations would be wise to consider the alternative: fewer-than-expected cuts this year and in 2025.

“So long as the Fed is in that thinking of a moderate slowdown, with inflation gradually moving through their target, there’s not going to be a bonanza of rate cuts,” said Fed Watch Advisors founder Ben Emons on Yahoo Finance’s Opening Bid podcast (video above or listen here).

Emons believes investors will end up getting “three or four rate” cuts over the next year. There’s no need for the Fed to move faster, with a recession seeming unlikely.

That sounds about right if current economic trends persist and Fed chief Jerome Powell is to be believed.

For one, the June jobs report showed the US economy added 206,000 nonfarm payroll jobs and the unemployment rate rose slightly to 4.1% from 4%.

RSM chief economist Joe Brusuelas told me the report signals the economy is at full employment and the jobs outlook continues to be bright.

Meanwhile, consumer confidence in the US advanced in May after three consecutive months of declines, according to the Conference Board’s latest index. The measure of US consumers’ short-term expectations for income, business, and the job market market increased to 74.6 from 68.8 in April.

Confidence levels remained relatively steady in June.

And the latest data out of the Federal Reserve show that the net worth of US households increased by $5 trillion in the first quarter to a record $161 trillion. The gain was fueled by higher stock prices, while at the same time, household debt as a percentage of GDP dropped to its lowest level since 2001.

These metrics support a view of improved consumer spending into year-end, after some volatility in the first half of 2024.

While Powell has acknowledged the progress on the inflation-fighting front, he has stayed consistent in tamping down rate cut expectations amid generally strong economic conditions.

“We’re well aware that if we go too soon, that we can undo the good work we’ve done. If we do it too late, we could unnecessarily undermine the recovery and the expansion,” Powell said at a public event held in Portugal last week.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Market expectations are for the Fed to uncork its first rate cut at its September meeting, followed by one more at the December gathering, according to CME Fed Watch data. By the end of 2025, the Fed is seen having a benchmark rate of 3.75% to 4%. But some 28% of market participants envision rates in the 3.25% to 3.75% range.

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The benchmark rate currently stands at 5.25% to 5.5%.

All of the data hasn’t stopped Wall Street from calling a far more aggressive rate cut timeline, however.

Citi economist Andrew Hollenhorst predicted in a new client note that Fed could slash interest rates by 200 basis points in its next eight meetings. The first rate cut would happen in September, with the campaign continuing into the summer of 2025 as the economy cools.

If this were to transpire, the Fed’s benchmark rate would stand at 3.25% to 3.5%, said Citi.

“A continued softening of activity will provoke cuts at each of the subsequent seven Fed meetings, in our base case,” Hollenhorst said.

Emons said on Citi’s prediction, “That’s truly a bonanza [of rate cuts], and that seems unlikely.”

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In the below Opening Bid episode, Bradesco’s head of equity strategy Ben Laidler says the market will continue to climb the wall of worry into the election.

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