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Investing.com -- JPMorgan strategist Fabio Bassi said the Federal Reserve’s expected policy shift at its September meeting is likely to be limited to a quarter-point reduction, stressing that “the bar for a 50bp cut remains high.”
In a note to clients, Bassi argued that Chair Jerome Powell’s dovish tone at Jackson Hole “warrants 25bp easing at the September meeting, an insurance rate cut driven by softness in payrolls while inflation is still above target.”
He added that the latest labor market data “virtually” rules out keeping rates on hold but does not justify a deeper cut.
Bassi also pointed to recession risks. JPMorgan’s model-based estimates “of US recession probability based on near-term economic indicators at around 1/3rd is a touch lower than our top-down assessment of 40%, which incorporates the impact from tariffs and immigration policy.”
Concerns over the Fed’s independence have grown after the dismissal of Governor Lisa Cook, which Bassi said “is seen as the administration’s efforts to influence Fed policies.”
However, he emphasized that investors should distinguish between “some political pressure for lower rates vs. a change in the institutional framework allowing executive power to supersede the central bank’s mandate.”
Bassi noted that markets are currently “pricing modestly easier monetary policy on the back of growth and risk management considerations,” while showing little concern about Fed independence.
He concluded that a Fed “insurance cut” will remain contained if economic weakness proves temporary, with the repricing of a shallower easing path leading to “bear flattening of the USD curve, modest correction on risk assets, and a temporarily strong USD.”