Will Recession Fears Cause Emergency Fed Interest Rate Cuts? Most Likely Not, Economist Says.

Forbes Business Breaking Will Recession Fears Cause Emergency Fed Interest Rate Cuts? Most Likely Not, Economist Says. Derek Saul Forbes Staff Derek Saul has covered markets for the Forbes news team since 2021. Following Aug 6, 2024, 11:49am EDT Share to Facebook Share to Twitter Share to Linkedin Topline History suggests it’s highly unlikely the
Will Recession Fears Cause Emergency Fed Interest Rate Cuts? Most Likely Not, Economist Says.

Will Recession Fears Cause Emergency Fed Interest Rate Cuts? Most Likely Not, Economist Says.

Following

Topline

History suggests it’s highly unlikely the Federal Reserve will undertake the rare step of lowering interest rates between set meetings of its rate-setting panel, according Bank of America’s top U.S. economist, as some called for immediate rate cuts after Friday’s poor jobs reports and the stock market slide rocked confidence in the direction of the U.S. economy.

Key Facts

Some experts like University of Pennsylvania professor Jeremy Siegel said the Fed should lower rates—a move typically used to boost growth—before the central bank’s September 17-18 meeting to address the weakening perception of the economy, and interest-rate futures contract traders reportedly priced in as much as 60% odds of a rate cut this week, though calls for a swift Fed reaction have abated as the stock market recovered some of its losses Tuesday.

But current conditions are “not even close” to support such an action based on recent history, Bank of America’s Michael Gapen wrote to clients Tuesday.

The Fed’s Open Markets Committee votes on the target federal funds rate at each of its 10 regularly scheduled annual meetings, but has the authority to do so outside of these conclaves.

Prior intermeeting cuts have “come amidst truly emergency conditions in the economy or financial markets,” noted Gapen, examining the seven between-meeting cuts dating back to the turn of the century.

Those include two during the beginning of the COVID-19 pandemic, two during 2008’s financial crisis, one immediately following the 9/11 attacks and two during the 2001 technology stock crash in which the Nasdaq Composite index fell 70% in a 15-month span.

“The bar for intermeeting cuts is extremely high and that conditions on the ground today do not warrant such action,” Gapen added, noting historical precedents suggest that today’s situation is “not even close” to warrant an emergency rate cut.

Key Background

Growth is slowing, but the U.S. just posted its 43rd consecutive month of strong labor growth, and July’s 4.3% jobless rate, though the highest in nearly three years, is lower than unemployment was for the entirety of 2008 to 2016. And the stock decline, even before Tuesday’s recovery, was hardly outside of the historic norm, as the S&P was only 8.5% below its July 16 all-time high, short of a 10% correction. The S&P enters correction territory once a year on average dating back to the 1930s anyways, according to Bank of America strategist Savita Subramanian. Still, the Fed operates on a dual mandate to keep inflation in check and maximize employment, and some think the decision to keep rates at their two-decade high of over 5% for the last 12 months even as inflation cooled was a mistake in terms of supporting labor market expansion. Rate cuts typically boost stock prices as companies’ profit margins improve with lower borrowing rates and more eager consumers, but some think intermeeting rate cuts can actually rattle the market further as it can signal panic at the Fed, causing further selling.

Tangent

It may be unlikely that the Fed cuts rates in coming weeks, but the market still expects strong action from the central bank at its September meeting. Federal funds rate futures contract trades price in a 100% chance of a cut next month, broken down into a 66% chance of a 50 basis-point cut and 34% odds of a 25 basis-point cut, according to CME FedWatch Tool. The Fed hasn’t lowered rates by 50 basis points at a normal meeting since 2008.

Big Number

25%. That’s the odds the U.S. enters a recession over the next 12 months, according to Goldman Sachs economists led by David Mericle. Though that’s an increase from Goldman’s prior 15% odds, risks for a significant downturn are “limited” considering economic data looks “fine overall” and the Fed has 525 basis points worth of cuts at its disposal.

Follow me on  Twitter or  LinkedInSend me a secure  tip

Trump Media to the Saudi Arabian influence on golf and what real-life billionaires think of ” Succession.” Send tips to dsaul@forbes.com. Follow Saul for analysis on the biggest daily economic and stock market happenings, ranging from inflation data to tech earnings to deep-dives on hot button assets. 

“>

Total
0
Shares
Leave a Reply
Related Posts
Anderson’s daughter-designed cleats support worthy causeAnderson’s daughter-designed cleats support worthy cause
Read More

Anderson’s daughter-designed cleats support worthy causeAnderson’s daughter-designed cleats support worthy cause

Anderson's daughter-designed cleats support worthy cause August 16th, 2024 Scott Merkin @scottmerkin Share share-square-781172 This story was excerpted from Scott Merkin’s White Sox Beat newsletter. To read the full newsletter, click here. And subscribe to get it regularly in your inbox. HOUSTON – There will be a slight surprise for Justin Anderson upon donning his
Russian spies ‘could be flying drones over UK military bases’ in a bid to obtain information on Britain’s secret training programme for Ukrainian soldiers in the fight against Vladimir Putin
Read More

Russian spies ‘could be flying drones over UK military bases’ in a bid to obtain information on Britain’s secret training programme for Ukrainian soldiers in the fight against Vladimir Putin

Russian spies could be flying drones over UK military bases to gain information about Britain's secret training programme for Ukrainian soldiers, it has been revealed. Russian intelligence has shown 'significant' interest in Operation Interflex, the British-led multinational plan to train and support Ukraine's armed forces, according to a guide handed out to British soldiers. The