Why the Fed will cut rates in September and then stop for the year, chief economist says

• The Fed will cut rates once in September, then stop for the year, Apollo chief economist Torsten Slok said.
• He argued that the US economy is strong enough to only need one cut.
• Slok cited recent jobless claims and retail data.

Investors may need to prepare for disappointment if they expect a sharp interest-rate pivot this year, Apollo's Torsten Slok said.

In an interview with Bloomberg TV, the chief economist dismissed the likelihood of multiple interest rate cuts this year. In his view, the economy is strong enough to only need one cut in September before the Federal Reserve pauses through the end of 2024. Rate cuts are done to stimulate the economy, and he thinks the US is in a position where just one will be necessary to achieve this.

Slok said recent jobless claims and retail data back this notion, as both prints signal that "everything is just fine."

Encouraging indicators include restaurant and hotel bookings, weekly company default data, and releases from retailers such as Target, Walmart, and TJ Maxx, he said.

Earnings strength and improved guidance among the latter have been especially uplifting for Wall Street, showcasing robust consumer demand. In July, retail sales notched the biggest jump in over a year, with sales climbing 1% compared to 0.3% forecasts.

"This whole narrative that we are slowing down is just not evident in the data," Slok said.

Nonetheless, investors expect several interest rate cuts ahead. According to the CME FedWatch Tool, there's a 67.5% chance rates will be slashed by 25 basis points next month before easing further this year.

This conviction rose from worries that rate policy has become too restrictive, given July's stronger-than-expected unemployment data.

Though the report briefly rocked markets and caused recession fears to spike, jobless claims later reverted to a five-week low by mid-August.

Meanwhile, Wednesday's revised non-farm payroll data from April 2023 through March 2024 has come in better than anticipated, with only 818,00 not created — not the one million downward revision estimated.

"The Fed last hike rates in July of 2023 and still now twelve, thirteen months later, we're still waiting for the data to slow down, and it's not happening in any meaningful way," Slok said.

Although he has long held the view that no interest rate cuts are coming this year, Slok now conceded that the Federal Reserve will implement the 25-basis point reduction next month.

But after that, the central bank will continue to follow its "wait and see approach," he said.

"I do understand that markets, quote, unquote, want the economy to slow down, and we are so hooked on the narrative from the Fed that interest rates need to normalize," he said. "But we have plenty of time for normalizing interest rates."

Market veteran Ed Yardeni also shares this perspective, expecting next month's jobs report to be much stronger than July's.