Major brokerages pivot to Sept Fed rate cut on Powell's labor warning

By Rashika Singh

(Reuters) -Major brokerages, including Barclays, BNP Paribas and Deutsche Bank, now expect a 25-basis-point U.S. Federal Reserve rate cut in September following Chair Jerome Powell's shift in tone at Jackson Hole toward rising risks in the labor market.

Powell's remarks at the Jackson Hole symposium emphasized a change in the Fed's reaction function, with greater weight now placed on labor market risks.

"This unusual situation suggests that downside risks to employment are rising," Powell said, warning that such risks could materialize quickly in the form of layoffs and a spike in unemployment.

In notes released on Friday after Powell's speech, Barclays pulled forward its previously expected September 2026 cut to September 2025, saying his speech introduced "an easing bias" and raised the bar for not cutting.

"Powell made (it) clear that the Fed intends to deliver a 'fine-tuning' rate cut in September unless the data dictates otherwise," wrote BNP economists, led by Calvin Tse. They reversed the brokerage's long-standing call for the Fed to stay on hold, forecasting cuts in both September and December.

Meanwhile, both Macquarie and Deutsche Bank revised their expectations of a cut in September and December, respectively, to a 25-bp cut each in those two months.

Morgan Stanley and BofA are the only two major Wall Street brokerages not expecting a September cut yet. Such a move is likely if incoming labor and inflation data confirm further softening, Morgan Stanley said.

Markets are now pricing in an 87% chance of a quarter-point rate cut at the September policy meeting, according to the CME FedWatch Tool, up from 75% before Powell's speech.

The rate-setting Federal Open Market Committee (FOMC) is scheduled to meet again on September 16 and 17.

Goldman Sachs and J.P. Morgan, meanwhile, reaffirmed their expectations for a September cut, aligning with the broader market view that softening data may warrant policy easing.

(Reporting by Rashika Singh in Bengaluru; Editing by Janane Venkatraman)