IM Securities "US Federal Reserve Expected to Cut Interest Rate by 25bp in September"

IM Securities forecasted on the 2nd that the Federal Reserve (Fed) will implement a 25bp interest rate cut, smaller than the 50bp "big cut" expected in September.

Park Sang-hyun, a researcher at IM Securities, stated, "If economic indicators do not significantly deteriorate going forward, there is a high probability that an orderly and continuous rate cut cycle of around 25bp will be maintained."

Researcher Park explained, "This sentiment is confirmed by the rebound in U.S. Treasury yields and the dollar index," adding, "The U.S. 10-year Treasury yield, which temporarily fell below 3.8%, rebounded to 3.9%, and the dollar index also bounced back from its yearly low."

This is because the U.S. labor market and consumer economy have shown favorable trends, while inflationary pressures have approached the Fed's target level. For instance, the weekly initial jobless claims, which can gauge the nonfarm payrolls for August, recorded about 231,000 last week. The 4-week average for August also slightly decreased to 232,000 from 238,000 in July.

Regarding this, Researcher Park said, "Although not a significant drop, the stabilization of jobless claims suggests that the labor market is not cooling as much as feared," and predicted, "The key August employment indicators to be released this week, such as nonfarm payrolls and the unemployment rate, will improve compared to July."

According to market consensus, the increase in nonfarm payrolls for August is expected to be 165,000 (compared to 114,000 in July), and the unemployment rate is forecasted at 4.2% (down from 4.3% in July).

Inflation risks are also steadily easing. First, the core Personal Consumption Expenditures (PCE) inflation rate for July remained at 2.6%, the same level as June, but the super core PCE inflation rate, which the Fed closely monitors, has been gradually slowing for four consecutive months, recording 3.25% in July after 3.52% in March. The decline in inflation expectations is even more encouraging. The University of Michigan's 1-year inflation expectation for August was 2.8%, the lowest since November 2020.

Researcher Park analyzed, "Considering that inflationary pressures expanded since 2021, this means that inflation and inflation expectations have started to enter or be controlled within the Fed's target range, returning to pre-2021 levels."

Park also noted, "As the risk of a hard landing in the U.S. economy eases, some credit spread levels have fallen back to early August levels," and evaluated, "With the U.S. economy achieving a soft landing and inflationary pressures easing, the possibility of a liquidity rally driven by interest rate cuts from major central banks is increasing."

He added, "If the August ISM Manufacturing Index and employment data to be released this week further support the U.S. economic soft landing, expectations for a liquidity rally in various asset markets, including the stock market, will be strengthened."

This content was produced with the assistance of AI translation services.