The Fed may cut interest rates deeper than the market expects.

The US Federal Reserve (Fed) will cut interest rates by a total of 125 basis points by the end of 2024, with the first cut expected to take place in September, according to Citi economist Robert Sockin.

Sockin predicts the Fed will be particularly “aggressive” if the jobs data, due out on September 6, weakens further.

With the labor market sluggish, the Fed is likely to choose to act more aggressively than the market expects, Citi's senior economist said.

Citi’s forecast is based on a volatile labor market picture with rising unemployment, Sockin said. The US unemployment rate unexpectedly rose in July 2024, from 4.1% in June 2024 to 4.3%.

Still, jobless claims have fallen in recent weeks. Last week, claims fell to 231,000, down from a yearly high of 250,000 at the end of July, according to data from the US Department of Labor.

At the Jackson Hole financial symposium hosted by the Fed last week, Chairman Jerome Powell said the Fed is ready to cut interest rates by September 2024.

“The time has come for policy to adjust,” Mr. Powell said, adding that “the path is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

According to CME Group's FedWatch tool, most investors agree on the forecast that the Fed will cut interest rates by 25 basis points in September 2024.

The forecast by Sockin and analysts at Citi also differs significantly from those recently issued by several other independent economists.

Most economists believe the Fed will not cut interest rates by half a percentage point while the economy is still performing well and inflation remains above the central bank's 2% target.