Another Two Cuts This Year? Latest Data Casts Doubt on That Outlook

TradingKey - On Thursday (local time), U.S. initial jobless claims for the week ending September 20 came in at 218,000, below both the forecast of 235,000 and the previous week’s revised figure of 231,000. Additionally, the final estimate for second-quarter real GDP growth was revised up to an annualized rate of 3.8%, surpassing expectations of 3.3%.

Ahead of the data release, Federal Reserve Governor Stephen Miran stated that long-term interest rates had shown limited reaction to last week’s rate cut, and that the Fed must proactively assess evolving economic conditions. He warned that the longer restrictive policy remains in place, the greater the risk to the economy, suggesting a total easing of 150–200 basis points may be warranted.

Following the stronger-than-expected data, market expectations for further rate cuts cooled. The probability of a rate cut in October fell from 91.9% to 83.4%, according to the CME Group’s FedWatch Tool.

Earlier on Wednesday, San Francisco Fed President Mary Daly echoed remarks made hours earlier by Fed Chair Jerome Powell, indicating that the next rate cut may not come quickly. While Daly acknowledged the need for easing, she emphasized the importance of balancing the Fed’s dual mandate of employment and inflation, calling for a cautious approach.

In light of the latest data, which clearly supports a more hawkish stance from the Fed, the market’s expectation of two additional rate cuts this year now faces significantly increased uncertainty.