A labor market softening more so than previously thought should spur faster and steeper interest-rate cuts by the Federal Reserve, according to the latest Bloomberg monthly survey of economists.
The unemployment rate is expected to peak at 4.4% by the end of this year and stay at that level through mid-2025, while economists in the August survey also see more moderate payrolls growth than they did a month ago.
That should leave the federal funds rate 75 basis points lower by the end of this year from its current level — the July survey only saw 50 basis points of easing — followed by a quicker pace of reductions into 2026.
The survey was conducted Aug. 16-21, following the release of the July jobs report, which showed one of weakest paces of hiring since the pandemic and a fourth month of rising unemployment. That triggered a closely watched recession indicator and helped spur a global selloff, but markets have since recovered as subsequent data have indicated a more gradually cooling economy.
Still, the survey projections suggest economists think the Fed is a step behind in starting to lower interest rates, which risks putting undue stress on the labor market.
“There is no rationale based on economic data for having the federal funds rate at 5.5%,” said Luke Tilley, chief economist at Wilmington Trust. “It’s time to ease up on the brake pedal.”
Fed officials have shifted their focus to the labor market as inflation has largely receded. Several policymakers saw the case for cutting rates in July and most saw higher risks to their employment goal, according to minutes of last month’s meeting released Wednesday.
While a September rate cut has been fully priced in for some time, traders and economists are debating how big it will be. Fed watchers will be closely attuned to Chair Jerome Powell’s speech later Friday morning at the central bank’s annual symposium in Jackson Hole, Wyoming for clues on the trajectory of policy and his framing of the labor market.
The 4.4% unemployment rate projection is the highest in the survey since November, which also followed a weak jobs report. The probability of a recession in the next 12 months rose for the first time since March 2023, but the odds now are less than half of last year’s level.
Despite the more downbeat views on employment, projections for the Fed’s preferred inflation metric — the personal consumption expenditures price index — largely held steady. Forecasts for another closely watched gauge, the consumer price index, were marked down through the middle of next year.
Economists are slightly more optimistic about growth this quarter, reflecting stronger projections for consumer and government spending, though they expect the pace to remain below 2% through the first half of 2025.
That’s a marked slowdown from the 2.8% rate registered in the second quarter, based on the government’s initial estimate.
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