US Fed to cut rates in September and once more this year: Experts

A Federal Reserve interest rate cut in September, the first this year, followed perhaps by another before year-end remains the base forecast for most economists polled by Reuters amid rising concerns about the health of the world’s biggest economy.

US inflation is rising again, with more upward pressure expected from President Donald Trump’s tariffs, and there have been big downward revisions to hiring figures over recent months that suggest the job market is weakening.

Trump has berated Fed Chair Jerome Powell over his reluctance to cut rates. And at the July meeting there was clear divergence from the steady rates position among a minority of Federal Open Market Committee members.

Alongside simmering doubts over the Fed’s independence from political interference and declining reliability of economic data, it has become more difficult for economists to make predictions with great conviction.

August is not typically a month for big forecast changes either. Many are waiting for the next round of inflation and jobs data, as well as a speech from Powell, his last at the Fed’s annual Jackson Hole conference held this month as his term as Fed chief ends in May.

Economists are broadly sticking to a more cautious outlook than interest rate futures traders, whose pricing suggests a near-certainty of a September cut and strong likelihood of another, and the possibility of a third by year-end.

A 61% majority, 67 of 110, predicted the Fed would lower its benchmark interest rate by 25 basis points to 4.00%-4.25% on September 17 for the first time this year, up from 53% in July’s survey. One forecast a 50 basis point move.

The remaining 42 said the Fed would hold rates again.

“We think that market participants are excessively confident in a September cut, as they are misinterpreting both the FOMC’s assessment of labour market conditions and its reaction function,” wrote economists at Barclays in a note.

“In our view, the main question is not so much about whether the Fed needs to ease policy to lean against job declines, but whether the situation warrants cuts on the grounds that the balance of risks has shifted away from inflation and toward the full employment mandate.”

Over 60% of respondents, 68 of 110, predicted there would be either one or two rate cuts this year, broadly unchanged from last month. But there was no consensus on where the federal funds rate would be at end-2025.

A near-80% majority of economists who answered an extra question, fewer than the usual sample, said the inflation impact from tariffs would be temporary.

A 68% majority also expected no serious erosion of the Fed’s independence during the remainder of Powell’s term.

Inflation forecasts were broadly unchanged from last month, averaging above the Fed’s 2% target through at least 2027.

The unemployment rate was expected to be around the current 4.2% or slightly above over the next few years, suggesting economists have not yet fully responded to the recent sharp downward revisions to hiring and may do so in the next poll if August jobs data are also weak.

“We come down on the side of thinking the Fed would prefer to retain optionality,” said Michael Gapen, chief US economist at Morgan Stanley.

“This would leave room for a soft August employment report to open the door for cuts, or a reasonably strong employment report plus another round of firming in CPI inflation to keep the Fed on hold.”

Separately, Foreign holdings of US Treasuries rose to record levels in June, topping $9 trillion for a fourth straight month, data from the Treasury Department showed on Friday.

Holdings of US Treasuries climbed to $9.13 trillion in June, up from $9.05 trillion in May. Compared with a year earlier, Treasuries owned by foreigners were up nearly $1 trillion, or 10% higher.

However, on a transaction basis, the US experienced outflows of $5 billion after buying roughly $147 billion in Treasuries in May, the largest since August 2022. In April, there was an outflow of $40.8 billion as President Donald Trump’s back-and-forth tariff policies roiled markets.

Japan remained the largest non-U.S. holder of Treasuries, with a record $1.147 trillion in June, up $12.6 billion from the previous month’s $1.134 trillion.

UK investors, the second-largest owner of US government debt, raised their pool of Treasuries to another record of$858.1 billion, up 0.6% from $809.4 billion in May.

The UK overtook China as the second-largest non-US holder of Treasuries in March. The UK is widely viewed as a custody country, generally a proxy for hedge fund investments. Other countries used by hedge funds for custody services include the Cayman Islands and the Bahamas.

Treasury holdings of China, the third-largest owner of US government debt, were little changed at$756.4 billion, compared with $756.3 billion in May, which was the lowest since February 2009 when the country’s stock of Treasuries dropped to$744.2 billion.

Agencies