BNY's Americas Macro Strategist John Velis maintains a call for three Federal Reserve rate cuts by year end, almost one more than current market pricing. He argues that headline-strong labor data mask a narrow, Health Care-driven jobs base and that inflation, while improved, remains above target, potentially weakening hawkish FOMC voices if disinflation persists.

Cuts view versus labor and inflation data

"It was a rough week for our Fed view, but we decided to stick with calling for three cuts to the funds rate by year end, almost a full cut more than currently priced in."

"Almost all the job creation reported by the establishment survey was in one sector – Health Care. This acyclical sector has been responsible for almost all the job creation since 2024. The narrow employment base is worrying."

"Inflation, which came out at the end of last week, looks much better than it did just a few months ago, although it remains above the Fed’s 2% target."

"Nevertheless, it is encouraging to see it not accelerate this month, suggesting that the committee’s hawks (namely Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan) might be on the back foot if this trend continues."

"Market pricing still sees a little more than two cuts by year end, with the December OIS contract implying 56bp of easing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)