Hua Er Jie Jian Wen·2025-08-05 07:17Economic Slowdown - The U.S. economy is showing clear signs of slowdown, particularly in the labor market, prompting expectations for an imminent interest rate cut by the Federal Reserve [1][2] - Recent employment data indicates a significant drop in potential monthly job growth from 206,000 in Q1 to 28,000 in July, reinforcing concerns about economic stagnation [1][2] - Goldman Sachs and Citigroup predict a high likelihood of a 25 basis point rate cut in September, with the possibility of a more aggressive 50 basis point cut if data worsens [1][10] Labor Market Weakness - The labor market is rapidly weakening, with July's non-farm payrolls adding only 73,000 jobs, far below expectations, and previous months' data revised down by 258,000 [2][4] - Goldman Sachs notes that the trend in potential job growth has sharply declined, well below the breakeven point of approximately 90,000 jobs needed to maintain market stability [2][4] - The negative revisions in wage data for May and June further confirm market weakness, suggesting that the labor market is not just slowing but experiencing a rapid deceleration [2][4] Federal Reserve's Policy Shift - Political dynamics in Washington, including the resignation of Fed Governor Adriana Kugler, may influence the Fed's decision-making and lead to a more dovish stance [5] - The recent FOMC meeting saw two governors voting against a rate hike for the first time since 1993, indicating a growing internal support for easing monetary policy [5] - Goldman Sachs anticipates that the appointment of new governors by President Trump could further shift the balance of power within the FOMC, facilitating earlier and faster rate cuts [5] Economic Growth Projections - Goldman Sachs projects that the U.S. real GDP growth rate will only be 1.2% annualized in the first half of 2025, significantly below its estimated potential growth rate [4] - Both Goldman Sachs and Citigroup agree that potential economic activity growth has slowed below potential, justifying a reduction in policy rates to neutral or lower levels [4] Interest Rate Forecasts - Goldman Sachs expects the Fed to cut rates by 25 basis points in September, October, and December of 2025, with further cuts in the first half of 2026, bringing the federal funds rate to a range of 3.0-3.25% [7] - Citigroup's baseline scenario predicts a policy rate drop to 3%, with risks leaning towards even lower rates if economic conditions deteriorate further [10] Currency Implications - The Fed's policy shift contrasts sharply with other major central banks, potentially weakening the U.S. dollar due to reduced interest rate differentials [13] - Goldman Sachs forecasts that even with a reduction to 3%-3.25% by mid-2026, the European Central Bank may maintain its deposit rate at 2%, further diminishing the dollar's appeal [13] - Concerns over U.S. economic governance and data quality may also exert downward pressure on the dollar, as indicated by recent market reactions to changes in labor statistics leadership [13]