Delayed Action from U.S. Fed Could Force Larger Rate Cuts, Warns Deutsche Bank Strategist

Delayed Action from U.S. Fed Could Force Larger Rate Cuts. A recent note from Jim Reid, a strategist at Deutsche Bank, has raised concerns about the potential economic consequences if the U.S. Federal Reserve delays cutting interest rates in response to an economic slowdown. In his note, dated September 9, Reid emphasized that a decline in the U.S. non-farm payroll report often signals an impending economic downturn with little advance warning. He cautioned that if the Federal Reserve does not act quickly enough, it may be forced to implement larger rate cuts later to regain control of the situation.

Reid’s warning aligns with insights from Adam Button, a currency analyst at ForexLive, who echoed the concern that a delayed response from the Fed could make it more difficult to prevent a deeper downturn. Reid specifically suggested that if the Fed is slow to act, it could eventually be forced to cut interest rates by as much as 50 basis points at a time to stabilize the economy.

The Risks of Delayed Action by the Federal Reserve

The U.S. Federal Reserve’s decisions on interest rates have a profound impact on the economy, particularly during times of economic uncertainty. According to Jim Reid, any delay in responding to worsening job market data, such as a declining non-farm payroll report, could exacerbate an economic downturn. Historically, a sharp decline in this report has signaled the onset of a recession, leaving the Fed little time to act.

Reid argues that by hesitating to cut rates when job losses begin to accelerate, the Fed could find itself in a situation where it needs to make larger cuts later. Larger cuts, such as 50 basis points or more, could be necessary to offset the economic damage caused by the delay, making it more challenging for the central bank to steer the economy toward a soft landing.

Financial markets, according to Reid, are already factoring in the possibility of significant rate cuts. He pointed out that markets currently expect over 2.5% in rate cuts by January 2026, suggesting that investors are anticipating a challenging economic environment ahead.

The Economic Outlook: What’s Driving the Fed’s Caution?

The Federal Reserve has been walking a tightrope between controlling inflation and preventing an economic downturn. With inflation still higher than desired, the Fed has kept interest rates elevated to slow economic growth and reduce price pressures. However, as job market data begins to show signs of weakness, many economists, including Reid, are warning that the Fed may need to shift gears and focus on preventing a recession.

The decline in non-farm payroll data, which measures the number of new jobs added to the U.S. economy each month, is often seen as an early indicator of a slowdown. If job creation falters, it can lead to lower consumer spending, reduced business investment, and ultimately a slowdown in economic growth.

Reid’s analysis suggests that the Fed’s current approach may leave it with little room to maneuver if the job market continues to weaken. If the central bank waits too long to cut rates, it risks allowing the economic downturn to deepen, which could make recovery more difficult and necessitate more drastic rate cuts down the line.

The Market’s Expectations for Future Rate Cuts

Financial markets are already bracing for significant rate cuts over the next two years. Reid points out that the market is pricing in over 2.5% in rate cuts by January 2026, reflecting investor concerns about the Fed’s ability to manage the economic risks ahead. This projection indicates that market participants expect the central bank to pivot from its current stance and start aggressively cutting rates to prevent a deeper recession.

If the Fed delays action and waits for more concrete signs of an economic slowdown, it could be forced to implement larger, more frequent rate cuts to catch up. This approach could destabilize financial markets, leading to increased volatility as investors adjust their expectations for future monetary policy.

Currency analyst Adam Button at ForexLive supported this view, warning that the Fed may find itself behind the curve if it does not act swiftly in response to weakening economic data. He noted that rate cuts in larger increments, such as 50 basis points, could be necessary to prevent a more severe downturn if the Fed is too slow to react.

The Potential for Larger Rate Cuts

Jim Reid’s analysis highlights the possibility of the Federal Reserve needing to cut rates by up to 50 basis points at a time if it delays action. In normal economic conditions, the Fed typically cuts rates in smaller increments, usually around 25 basis points, to avoid shocking the financial system. However, in times of economic stress, the central bank may be forced to take more aggressive action.

Larger rate cuts could signal that the Fed is concerned about the state of the economy and is willing to take more drastic measures to prevent a deep recession. However, such moves could also have unintended consequences, such as sparking concerns about financial stability or increasing inflationary pressures in the long term.

For now, Reid suggests that the Fed should be more proactive in addressing the risks posed by weakening job market data. By cutting rates earlier and more gradually, the central bank may be able to prevent a more severe downturn and avoid the need for larger, more disruptive rate cuts later on.

Conclusion: Delayed Fed Action Could Lead to Larger Rate Cuts

Jim Reid’s warning about the risks of delayed action from the U.S. Federal Reserve is a stark reminder of the challenges facing the central bank as it balances inflation control with the need to prevent a recession. If the Fed hesitates in cutting rates in response to job losses, it may be forced to implement larger rate cuts later, potentially up to 50 basis points at a time, according to Reid’s analysis.

With financial markets already pricing in significant rate cuts by January 2026, the stakes are high. A proactive approach from the Fed could prevent a deeper economic downturn, while delayed action may lead to more severe consequences for the U.S. economy.

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