The Heated Debate on FED Rate Cuts

The debate on whether the Federal Reserve (FED) will start cutting the decade-high interest rates in 2024 has raged since at least 2023. Hopes were high late last year that reductions would soon begin. However, reheating inflation in this year's initial months has somewhat slashed the hopes.

Subsequently, the debate grew even fiercer. The stock market seemingly behaved paradoxically. Major benchmark indices, such as the S&P 500, rose to record highs in an environment that theoretically should lead to a slowdown.

Investor Concerns and Market Behavior

This situation has led some prominent investors to believe that a reduction in interest rates could be the straw that breaks the camel's back, leading to a full-blown bubble and a crash.

By July 9, however, with inflation again appearing more manageable and fears that the U.S. economy may be headed for a significant slowdown, bold funds rate predictions have again emerged.

Indeed, on Friday, July 5, Citi (NYSE: C) sent a note stating that there have been increased signs of a slowing economy and that the FED is likely to start aggressively cutting interest rates.

The note focused on job reports, which, while acknowledged as being strong at face value, are considered problematic once matters like losses of temporary services jobs are considered.

The Canary in the Coal Mine

Such measures are frequently a canary in the coal mine. They may indicate employers are trying to cut costs by firing the least protected workers before a probable recession.

According to Citi, the situation will likely lead the Fed to attempt to stimulate the economy by reducing borrowing costs. The American central bank is forecast to lower interest rates by as much as 200 points—bringing them down to between 3.25% and 3.50%—over the next 8 FOMC meetings.

Consensus Among Analysts

CME Group's (NYSE: CME) assessment coincides with Citi's. There is currently a 74% chance that the September meeting will reduce the funds rate to between 5% and 5.25%, from the now long-standing rate of 5.25% to 5.50%.

Central banks have recently warned analysts and investors that they are overly bullish and that a substantial correction may be imminent, similar to many other experts, which means this is a likely scenario.

IMF's Warning

The systemic risks hinting at a possible crash and upcoming interest rates have increased so much that even the International Monetary Fund (IMF) has warned the U.S. it needs to address them urgently.