Asset managers forecast 25-point rate cut at next week’s Fed meeting

As inflation continues to ease — and buoyed by some recent dovish remarks by Federal Reserve Chair Jerome Powell — asset managers expect the central bank to finally begin cutting interest rates by 25 basis points at its meeting next week.

Josh Jamner, investment strategy analyst at ClearBridge Investments, said he expects a 25 basis point rate cut because the last several months of inflation data have been favorable and potentially represent a period of normal variability with respect to the consumer price index.

ClearBridge has $184.9 billion in assets under management

Skyler Weinand, chief investment officer at the $1.8 billion Regan Capital, has also penciled in a 25-point rate cut by the Fed.

“The Fed wants to finally initiate a rate-cutting cycle to get in front of increasing unemployment levels and in order to calm fears that the Fed may already be behind the curve,” Weinand said. “The economy is strong and inflation generally is under control, but the Fed has some wiggle room to cut interest rates by 1% to 1.5% over the next 12 months."

Jack McIntyre, global fixed-income portfolio manager at Brandywine Global Investment Management, said that the August inflation report “was like the Hippocratic Oath, it did no real harm to the financial markets.”

McIntyre also anticipates a 25-point rate cut next week, saying a more aggressive 50-point cut “should not be in the cards as the recession call needs further deterioration in the labor market and the Fed likes its optionality.”

The Bureau of Labor Statistics reported Sept. 11 that the CPI rose an annualized 2.5% from a year ago in August — the smallest 12-month increase recorded since February 2021 — below expectations and below the 2.9% figure recorded in July.

Economists were expecting a 2.6% annualized CPI figure for August, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 3.2% in August, the same pace as reported in the prior month.

The Fed has considered the inflation rate a key factor in its monetary policy decisions, and its key short-term interest rate is now in a range of between 5.25% and 5.5% after the central bank kept rates unchanged for the eighth consecutive time at its most recent meeting on July 31.

As of the morning of Sept. 11, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 85% probability that the Fed will cut rates by 25 basis points when it issues its next monetary policy decision on Sept. 18, and a 15% probability it will cut rates by 50 basis points.

Weinand noted that while the market is pricing in four rate cuts this year and nine cuts over the next 12 months, he finds such a scenario too “aggressive” and says this will only occur if “unemployment runs well above 5% or if there is a calamity or black swan event.”

Given that economic data and the economy will likely oscillate over the next year, Weinand expects the Fed to “hold steady” a few times over the next year and only cut a total of five or six times, “which is far fewer than the market expects.”

Weinand added that as inflation appears to be under control, the Fed is now more focused on full employment.

“The challenge for the Fed is to make sure that its efforts to fight inflation are not hurting the job market, and so far that is the case. The Fed can have its cake and eat it too,” he said.

However, John Luke Tyner, portfolio manager and head of fixed income at the $7 billion Aptus Capital Advisors, was concerned by shelter costs, which rose 0.5% in August and climbed 5.2% for the 12-month period.

“The celebrated June dip in shelter inflation looks to be challenged where the continued move lower that many, including the Fed, had called for could be in question,” Tyner said. “We all know shelter inflation needs to drop to bring inflation back to target, so this is big.”

Still, Tyner also expects a 25-point rate cut, ruling out a 50-point move.