J.P. Morgan Brings Forward Fed Rate Cut Forecast to September Amid Evolving Economic Landscape

In a significant revision to its economic outlook, J.P. Morgan now expects the U.S. Federal Reserve to cut interest rates at its September meeting. This new forecast, which brings the anticipated action forward by several months, is a direct response to recent shifts in both the economic and political spheres. The brokerage had previously predicted a single 25 basis point cut in December, but a new analysis of the labor market and the potential for political divisions within the Fed’s rate-setting committee has prompted a change in strategy.

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“For Powell, the risk management considerations at the next meeting may go beyond balancing employment and inflation risks,” wrote J.P. Morgan analyst Michael Feroli in a Thursday note.

This revised outlook comes as the U.S. economy navigates a complex period. After a prolonged campaign to combat inflation with a series of aggressive interest rate hikes, the central bank’s policy has been “tight” for an extended period. Now, with inflation seemingly under control but with a potential softening in the labor market, the Fed’s dual mandate—to achieve both maximum employment and price stability—is facing a renewed test. The decision-making process is further complicated by the political pressure from President Donald Trump and the uncertain impact of a new nomination to the Fed Board.

The market has reacted sharply to the changing sentiment. According to CME Group’s FedWatch tool, a key indicator of market expectations, traders are now pricing in a 91.4% chance of a rate cut in September, a dramatic increase from just 37.7% the previous week. This shift reflects a collective belief that the factors cited by J.P. Morgan are compelling enough to push the Fed toward a more dovish stance sooner rather than later.

Understanding the Federal Reserve’s Dual Mandate

To fully appreciate the significance of J.P. Morgan’s updated forecast, it’s essential to understand the Federal Reserve’s core mission. The central bank operates under a dual mandate established by Congress: to promote maximum employment and to maintain stable prices. These two goals are often in a delicate balance. A strong economy with low unemployment can sometimes lead to inflation, as rising demand and higher wages push prices up. Conversely, a tight monetary policy designed to fight inflation, such as raising interest rates, can slow the economy and potentially lead to job losses and higher unemployment.

For the past few years, the Fed’s primary focus has been on taming persistent inflation, which had surged to levels not seen in decades. Under the leadership of Chair Jerome Powell, the Federal Open Market Committee (FOMC) embarked on a historic campaign of raising the benchmark federal funds rate. This action made borrowing more expensive for businesses and consumers, cooling demand across the economy. As a result, inflation has trended downward, approaching the Fed’s long-term target of 2%.

However, the consequences of this tight policy have begun to appear in the economic data. The labor market, which remained remarkably resilient for a long time, has started to show signs of cracking. J.P. Morgan’s new forecast suggests that these signs are now significant enough to warrant a pivot in the Fed’s strategy. The bank believes that the risk of a weakening labor market and a potential increase in unemployment now outweighs the risk of re-igniting inflation, making a rate cut a prudent risk-management decision.

Political Winds and a New Voice on the Board

The Fed’s independence from political pressure is a cornerstone of its effectiveness. However, the central bank has often found itself in the crosshairs of the executive branch. This dynamic has been particularly pronounced during President Trump’s administration, which has seen repeated public clashes between the President and Chairman Powell over monetary policy. Trump has consistently called for lower interest rates to boost the economy, often accusing the Fed of hindering growth.

This tension has been brought to the forefront once again with the President’s latest nomination. On Thursday, Trump nominated Stephen Miran, the current Chair of the Council of Economic Advisers, to fill a temporary seat on the Fed Board, replacing the outgoing Governor Adriana Kugler. The confirmation process for Miran before the September 16-17 policy meeting is uncertain, but his potential presence on the FOMC introduces a new element of political influence and unpredictability.

The significance of Miran’s potential appointment lies in the delicate balance of opinions within the FOMC, the committee responsible for setting the federal funds rate. The committee consists of twelve members: seven governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and the presidents of four other Reserve Banks on a rotating basis. A vote is a carefully considered process, and a consensus is often sought. A single dissenting vote, particularly from a new member with a clear political affiliation, can signal a fracture in that consensus.

As Feroli noted, “In the off chance Miran is governor by the time of the next meeting, that could imply three dissents. That’s a lot of dissents.” Three dissents on a single policy decision would be a remarkable event, suggesting deep divisions within the committee and potentially signaling a more fractured and less predictable Fed going forward. Such a split could undermine confidence and create market volatility, a risk that Chairman Powell and other governors would likely want to avoid. The desire to maintain a unified front and a clear policy direction could, in itself, be a reason for the committee to lean toward a rate cut, particularly if it can be justified by the incoming economic data.

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The Economic Data Point of No Return

J.P. Morgan’s forecast is heavily contingent on a crucial piece of data: the August jobs report. This monthly report, released by the Bureau of Labor Statistics, is one of the most important economic indicators and is scrutinized by policymakers and analysts alike. It provides a detailed snapshot of the labor market, including key metrics such as the number of jobs created, the unemployment rate, and average hourly earnings.

The brokerage’s note specifically pointed to a potential unemployment rate of 4.4% or higher as a possible trigger for a larger-than-expected rate cut. A rate cut of 25 basis points (a quarter of a percentage point) is the standard move, but a larger cut—such as 50 basis points—would signal a more urgent and forceful response to a rapidly deteriorating labor market. This would be a significant step, as the Fed typically prefers to move in smaller increments to avoid overreacting and to give the economy time to adjust.

The Fed’s decision in September will be a classic test of the dual mandate. On one side are policymakers who may still be wary of inflation and hesitant to cut rates too soon. They would argue that a lower-than-expected unemployment reading in August would justify keeping rates steady to ensure that inflation is fully defeated. On the other side are those who believe the economy is at a critical inflection point. For this group, a rising unemployment rate would be a clear signal that the tight monetary policy has gone on long enough and that it’s time to ease up to prevent a more significant economic downturn. The jobs report will provide the raw data that will be used to fuel this debate and ultimately shape the FOMC’s decision.

The Waller Factor: A Potential New Era at the Fed

Separately, the J.P. Morgan note also shed light on the potential succession plan for the Fed’s leadership. The report suggested that Fed Governor Christopher Waller is emerging as the frontrunner to succeed Jerome Powell as Fed Chair. This is a crucial consideration for financial markets, which crave stability and predictability from the central bank.

Waller has a reputation as a data-driven and influential member of the FOMC. He is known for his clear communication and for his ability to articulate his policy views in a consistent and transparent manner. The note from J.P. Morgan said that his appointment would “likely be welcomed by financial markets” because it would reduce the uncertainty surrounding the Fed’s reaction function—that is, how the Fed responds to new economic data. This predictability is vital for investors, as it allows them to make more informed decisions about future economic conditions.

Analysts at Barclays echoed this sentiment, stating that Waller’s appointment would “support longer-dated bonds.” This is because a predictable Fed is less likely to surprise the market with unexpected policy shifts. This predictability helps to stabilize the bond market, particularly for longer-term government bonds, which are highly sensitive to changes in interest rate expectations. A clear and consistent leader like Waller could reassure investors that the Fed’s path is well-defined, even as the economic data continues to evolve.

The Market’s Verdict: A Dramatic Shift in Expectations

The most immediate and telling reaction to J.P. Morgan’s forecast has been in the financial markets themselves. The CME Group’s FedWatch tool is a real-time gauge of market sentiment, using data from futures contracts to calculate the probabilities of various Fed policy outcomes. The dramatic shift in its readings is a powerful testament to the influence of a major bank’s analysis.

The jump from a 37.7% probability of a September rate cut to a stunning 91.4% in just one week indicates that the market has rapidly absorbed and accepted the arguments put forth by J.P. Morgan. This isn’t just a simple change of mind; it reflects a recalculation of risk and a new consensus among traders. A high probability of a rate cut suggests that the market believes the Fed will be forced to act to address a weakening economy, even if it means moving more quickly than previously anticipated. The market’s strong belief in a September cut will, in turn, put additional pressure on the Fed to deliver, as failing to meet these expectations could lead to significant market disappointment and volatility.

In conclusion, the coming weeks will be critical for the U.S. economy and for the Federal Reserve. J.P. Morgan’s new forecast has provided a powerful new narrative, one that centers on a potential softening of the labor market, increasing political pressure, and a new face on the FOMC. All eyes will now be on the August jobs report to see if the data supports this new outlook, setting the stage for a potentially pivotal decision at the Fed’s September meeting.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

8th August, 2025