Lazard said the weakening economy could help push the Federal Reserve to cut interest rates this year more than the market currently expects. In his second-half outlook, Ronald Temple, the firm’s chief market strategist, said his base case is for the Fed to cut interest rates starting in September and two more cuts later this year. The current benchmark federal funds borrowing rate is 5.25% to 5.50%. Temple said that over time, both inflation and economic growth are likely to decline and unemployment to rise. “Through September, the Federal Open Market Committee will release three additional inflation and labor market reports to determine whether price pressures are contained,” the report states. The Fed’s next meeting will be held at the end of July, although the central bank is believed to A rate cut by then is extremely unlikely. Then there’s the September meeting, followed by November and December. Temple’s base case rate cut is more aggressive than current market views. As of Tuesday morning, the federal funds futures market suggested that two rate cuts were most likely before the end of the year, with the likelihood of further cuts at about 22%, according to the CME FedWatch tool. The calculation assumes the central bank lowers the benchmark interest rate by 25 basis points at a time, or 0.25 percentage points. Federal Reserve Chairman Jerome Powell told CNBC’s Sarah Eisen on Tuesday that the Fed has “made considerable progress” on inflation but is not yet ready to cut interest rates. The Fed’s November meeting is held the same week as the U.S. presidential election, leading some to speculate that the Fed will keep interest rates steady at the meeting to appear apolitical. However, Temple said the Fed will be able to take action based on economic data. “My assumption is that the FOMC will make a decision based on data and market expectations, ignoring political considerations,” the report said. Temple warned that the Fed’s rate cuts may not end up significantly lowering long-term interest rates, which is important for waiting. Falling mortgage rates could be bad news for potential homeowners. “I expect the federal funds rate to fall to 3.5% or above, which means long-term rates are unlikely to fall significantly, and the fair value of the 10-year Treasury note (Treasury bond) is between 4% and 5%. If this is the case, The main benefit of the rate cut will be at the short end of the yield curve for floating rate borrowers,” the report said.
