Wall Street investment banks divided over future path of Fed rate cuts amid weak data

Market Expectations Fluctuate Significantly, Timing of Interest Rate Cuts Becomes Focus

Recently, a significant downward revision of U.S. non-farm employment data has fueled strong market expectations for the Federal Reserve to cut interest rates sooner. Although CME data shows that the probability of a 25 basis point rate cut at the September meeting is nearing 95%, there is growing divergence among major Wall Street investment banks regarding future monetary policy.

Goldman Sachs, Citibank, and JPMorgan Chase tend to believe that the Federal Reserve will take swift and strong easing measures, while Bank of America, Barclays, and HSBC hold a more cautious or even conservative stance, with some institutions even believing that rate hikes are not off the table this year. Behind this round of debate, there are differences in the interpretation of employment data, as well as differing judgments about external variables such as political interference and potential inflation resurgence.

Aggressive and Conservative Approaches Coexist; Serious Split Among Investment Banks

Among those supporting aggressive easing, Goldman Sachs argues that the evident slowdown in the labor market, with monthly job gains falling below 30,000, leaves the Federal Reserve with no choice but to act quickly to counter the economic cooling. JPMorgan Chase even predicts a cumulative rate cut of up to 125 basis points this year and suggests that "emergency rate cuts" could be implemented before the September meeting.

Citibank similarly aligns with the easing camp, pointing out that the rising unemployment rate and the risk of potential output slowdown constitute sufficient grounds for policy adjustments. Their strategy team believes that a reduction in interest rates to 3% will become the new policy norm, conducive to stabilizing the financial environment.

However, on the other side, Bank of America argues that the current market is overly pessimistic, overlooking the resilience of consumer spending and the slight adjustments in the labor supply-demand structure. The bank emphasizes that inflation risks still exist, especially in the context of tariff reactivation, and that the Federal Reserve may be forced to maintain high interest rates until 2026.

Barclays and HSBC have not completely ruled out the possibility of rate cuts, but they are cautious about the timing. The former delays the rate cut to the end of the year, while the latter estimates that the real easing cycle will gradually begin in 2025.

Political Factors and the Independence of the Federal Reserve as Controversial Focus

Another major background of Wall Street's division is the frequent release of political interference signals. The Trump administration has recently increased pressure on the Federal Reserve, especially after the resignation of Federal Reserve Governor Kugler, with widespread speculation in the market that the president may seize the opportunity to appoint more "compliant" governors, thus influencing the voting tendencies within the FOMC.

Analysts point out that if such appointments are expedited, they will introduce variables to the outcome of the September rate-setting meeting, causing some investment banks to reevaluate whether the Federal Reserve's independence has been compromised.

Of note is that Trump not only publicly calls for rate cuts but also made a rare visit to the Federal Reserve headquarters, highlighting his heightened focus on monetary policy. This behavior raises concerns among some market participants about whether political forces might influence the Federal Reserve's impartial judgments.

Rate Cut Window Approaching but Direction Unclear

Although market expectations are high, the key lies in whether upcoming economic data will continue to support easing policies. If August's inflation and employment data further weakens, it will provide justification for aggressive rate cuts; however, if the data rebounds, the Federal Reserve might fall back into a "wait-and-see mode."

Currently, the "dove faction" within the Federal Reserve is gaining strength, but the "conservative faction" has not completely exited. Under dual pressures, the future policy path of the Federal Reserve could become more complex and may even require repeated short-term adjustments.

For investors, it may not be the assessment of whether there will be a rate cut that is most crucial now, but rather how to deal with the volatility caused by fluctuating expectations. The debates on Wall Street are a reflection of this uncertainty.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.