The Fed: Get out the scissors — Barclays forecasts a half-point rate cut from the Fed in July

iStockphoto

The weak jobs report is prompting economists to expect Federal Reserve interest-rate cuts sooner rather than later.

In a note to clients, Barclays’ economic team said the Fed will cut interest rates by 50 basis points in July, and an additional quarter point in September. That’s sooner than their earlier forecast of a 50 basis point cut in September and another quarter-point in December.

The primary reason for the change is May’s weakness in service sector employment, which slumped to 82,000 new jobs in May, less than half the gain in April, said Michael Gapen, chief U.S. economist of the London-based bank.

“While we do not want to over-emphasize any one data point, slow services sector employment, if maintained, could signal that weakness in the trade-sensitive manufacturing sector is spilling into the broader U.S. economy,” Gapen said.

Economists at Morgan Stanley said a half-point rate cut in July couldn’t be ruled out.

Trade tensions are escalating at the same time the economy is slowing down materially. There is a worry that business unease about growth might become a self-fulfilling prophesy.

Carl Tannenbaum, chief economist at Northern Trust in Chicago, said that a June rate cut might be the best way for the Fed to bolster confidence in the outlook.

Read: A June interest-rate cut may be best, if Fed wants to inject positive surprise, economist says

Stocks rose sharply Friday in anticipation that of Fed easing. The Dow Jones Industrial Average DJIA, +1.23%   was up almost 300 points.

Kevin Cummins, senior U.S. economist at Natwest Markets, said the May payroll data “add to the building case for an ‘insurance’ Fed rate cut, thought do not suggest an urgency for the Fed to act.”

His base case remains a quarter-point cut in both September and December.

In contrast, Peter Hooper, chief economist at Deutsche Bank Securities, still has the Fed holding interest rates steady this year.

Hooper said the latest trade dispute between Mexico and the U.S. “could go either way.” He said next week’s May retail sales report would be key to the outlook.

Read More