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The US economy is showing signs of a potential downturn, prompting speculation that the Federal Reserve may need to lower interest rates more aggressively than anticipated.

Recent economic data has raised concerns among experts. Initial jobless claims surpassed forecasts, reaching 249,000 last week. Simultaneously, the US ISM manufacturing index fell significantly below expectations, suggesting a contraction in manufacturing activity. Notably, the employment component within the ISM index plummeted to its lowest level since the pandemic, indicating a sharp slowdown.

These developments have solidified the market’s belief that the Fed will shift towards a looser monetary policy. Just weeks ago, there was uncertainty about the number of rate cuts the Fed would implement. However, the recent drop in the 10-year US Treasury yield below 4% for the first time in six months has heightened the urgency for swifter action. Futures markets now predict a 100% probability of an interest rate cut at the Fed’s upcoming September meeting, with the possibility of a more substantial 50-basis point reduction.

The divergence between the 2-year US Treasury yield, a barometer for the Federal Funds Rate, and the actual Federal Funds Rate further emphasizes the need for adjustment. This disparity highlights the challenge faced by Fed Chairman Jerome Powell, who must strike a delicate balance between curbing inflation and averting a recession.

Worrying signs in the unemployment rate have intensified these concerns. While the recent rise in unemployment has been attributed to increased worker supply rather than job losses, the continuation of these trends could lead to a significant surge. Predictions suggest the unemployment rate could reach 4.5% by year-end, surpassing the Fed’s own estimate of 4.0%. This discrepancy suggests there may be more room for Fed policy easing than currently acknowledged.

Should the unemployment rate indeed reach 4.5% by September, it would trigger the Sahm Rule, a highly accurate recession indicator. This rule posits that a rapid increase in the unemployment rate signals a high probability of a recession. If the demand for workers continues to weaken and layoff rates rise, the economy could be edging closer to a recessionary danger zone.

In conclusion, the current economic landscape necessitates a proactive and potentially more aggressive approach from the Federal Reserve. The data points to a slowdown, and timely rate cuts may be essential to mitigate the risks of a recession.