The US could enter a recession if the Fed doesn't cut rates, strategists say

• Macquarie strategists are warning of the possibility of a US recession without the Fed's rate cuts.
• US unemployment rose to 4.3% in July, and consumer sentiment was mixed in August.
• Investors are mostly eyeing a 25 basis point rate cut in September.

The US economy risks a recession if the US Federal Reserve does not cut rates, according to Macquarie strategists in a Wednesday note.

Their assessment is based on US jobs data and consumer sentiment.

"We're not saying that a recession is coming, but absent Fed rate cuts that will take place, a recession would be much likelier," wrote Thierry Wizman and Gareth Berry, FX and rates strategists at Macquarie, in a Wednesday note.

The US unemployment rate rose to 4.3% in July from 4.1% in June, according to the Bureau of Labor Statistics.

Meanwhile, the Conference Board consumer sentiment report released on Tuesday showed "mixed feelings."

"Consumers' assessments of the current labor situation, while still positive, continued to weaken, and assessments of the labor market going forward were more pessimistic. This likely reflects the recent increase in unemployment," said Dana M. Peterson, the chief economist at The Conference Board, in a press release.

Consumers were also a bit less positive about future income, Peterson added.

"What was worrisome was that respondents saying that jobs were hard to get inched higher, while those saying jobs were plentiful edged lower," wrote the Macquarie strategists.

The spread between the two measures tracks the unemployment rate very closely, according to Macquarie's analysis.

This spread pushed to a new year-to-date high in the August survey. It sits at the widest it has been since March 2021 — when the unemployment rate was 6.1%.

"We think that it would be highly unlikely that the unemployment rate would not be rising against the widening of this spread," the Macquarie strategists wrote.

Markets have been pricing in interest rate cuts following Fed Chair Jerome Powell's remarks at Jackson Hole last week that "the time has come for policy to adjust" — a clear signal that the central bank is poised to cut rates.

Macquarie is just one of the latest on Wall Street to weigh in on how the US jobs outlook could impact the Fed's rate decision, which could take down the current 5.25% to 5.50% target.

JPMorgan on Tuesday said the Fed is likely to deliver steep rate cuts because it's been "shaken" by a weakening labor market.

CME's FedWatch tool shows investors largely pricing in a 25-basis-point cut at the next Fed meeting held over two days from September 17.