Citi now expects the Fed to cut 125bps by the end of year

Citi adjusted its forecast for the Federal Reserve's monetary policy following the release of the July jobs report, which indicated a slower-than-expected growth in employment.

"We now pencil in 50bp rate cuts in September and November, with 25bp cuts at consecutive meetings thereafter to reach a terminal rate of 3-3.25% by mid-2025 (25bp more of cumulative cuts than we had previously)," Citi economists wrote in a note Friday.

The U.S. economy added 114,000 jobs in July, falling short of the anticipated 175,000 jobs and Citi's own estimate of 150,000. The increase in private employment accounted for 97,000 jobs, with government employment contributing an additional 17,000 positions.

Citi's analysis of the employment data suggests that the labor market may be entering a phase of more pronounced weakening. With the recent uptick in unemployment and a discernible slowdown in job creation, Citi anticipates the Fed may start implementing larger rate cuts.

The current policy rates, considered to be in restrictive territory, along with Fed officials' growing attention to employment, support Citi's revised expectations.

Other major Wall Street research players are also changing their Fed forecast models, with Evercore ISI calling for "at least three Fed cuts in 2024."

"Following this report we think the Fed will cut at least three times in 2024 – September, November and December – in a more front-loaded effort to secure the soft landing. Further we think there is now a realistic possibility that the first move will be a 50bp cut in September," they said.

"A 50 in September would become the base case if subsequent data confirms and extends a more marked weakening in the labor market, with a further increase in unemployment and payrolls sub 100,000 in August, JOLTS weakening and layoffs / initial claims moving up."

Major US indices fell sharply on today's data with both the S&P 500 and Nasdaq Composite index down by more than 2%.