WASHINGTON
Recession concerns in the US and a stock market sell-off put more pressure on the Fed to cut interest rates, though experts say that the central bank is unlikely to introduce cuts before its September meeting.
Selling pressure in the markets jumped due to concerns that the US economic activity may slow down even more sharply than anticipated.
Non-agricultural employment in the US climbed by 114,000 in July, short of expectations, while the unemployment rate rose to 4.3% from 4.1%, rising for the fourth consecutive month, data released last week showed.
Additionally, the Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) fell to an eight-month low of 46.8 in July, below market expectations.
Given this news, the probability of the Fed cutting its policy rate by 50 basis points in September reached over 90% in the money markets, while sharp declines in the markets revealed the probability of an emergency rate cut from the bank.
The Fed made its last emergency rate cut decision in March 2020 due to growing concerns of the economic effects induced by the COVID-19 pandemic, though analysts said that the situation in the markets is unlikely to prompt the bank to cut interest rates before September’s meeting.
Chicago Fed President Austan Goolsbee said on Monday that the employment figures came in weaker than expected, though still the data doesn’t point to a recession, while declining to comment on the possibility of an emergency Fed meeting to cut rates.
‘No recession on horizon’
Sam Stovall, chief investment strategist at the Center for Financial Research and Analysis, told Anadolu that Wall Street is convinced that the recession risk rose due to weaker-than-expected data released last week, though he said he doesn’t expect a new bear market, as the recession threat is “overblown.”
“The U.S. economy grew 2.8% in Q2 and should post quarterly gains of 2.0% or more through Q4 2025, (while) core PCE (personal consumption expenditures index) is not projected to return to the 2.0% level until late 2025 at the earliest,” said Stovall.
“In the late 1970s, the Fed lowered rates too quickly, which reignited the flames of inflation, they don’t want to make that same mistake,” he said.
Stovall added that he doesn’t expect the bank to introduce an emergency rate cut, as he and the Fed “do not see a recession on the horizon.”
“An intra-meeting rate cut would be an overreaction to the current market sell-off and could make the situation even worse, indicating that they might know that the economy is a lot weaker than investors already fear,” he added.
‘Fed needs to cut interest rates aggressively when it meets in September’
Mark Zandi, chief economist at Moody’s Analytics, told Anadolu that the “disappointing” employment data and the Fed keeping rates “too high for too long” are the “catalysts for the stock market sell-off,” adding that an overvalued stock market vulnerable to a correction further accelerated the decline.
“The Fed needs to cut interest rates aggressively when it meets in September, and normalize rates by this time next year, to avoid a recession; odds are the Fed will respond appropriately, but another mistake by the Fed is a serious threat,” said Zandi.
He noted that an emergency rate cut could be seen as a sign of “panic and desperation” and could trigger unpredictable reactions from investors.
“Emergency rate cuts are saved for times when markets and the broader financial system are freezing up. That has not happened, at least not yet,” he added.
‘Investors’ view of reality has caused equity prices to drop’
Ryan Sweet, chief economist at Oxford Economics, told Anadolu that the lower-than-expected employment data in July and the rise in unemployment will make it seem like the Fed is “behind the curve,” but he said that the monthly employment data doesn’t follow a stable course and there’s no need to overreact to a single report.
Sweet noted that the employment data came after the ISM’s weaker-than-expected manufacturing PMI, fueling recession concerns.
“Although we see things differently than the markets, investors’ view of reality has caused equity prices to drop,” said Sweet.
“The rise in the unemployment rate in July will fan concerns because it triggered the so-called Sahm rule, which uses the jobless rate to signal a coming recession; we’re skeptical of this because the rule only correlates with a recession when the increase in the unemployment rate is primarily due to layoffs, which is not the case now,” he added.
Sweet highlighted that a recession is possible in any year, but high employment is mostly driven by increases in labor supply as opposed to increases in permanent layoffs.
“Recession risks over the next year have risen but they’re not high enough to adopt a downturn as our baseline,” he said.
Sweet underlined that the Fed knows why the unemployment rose and that the reasons are less threatening if they are induced by increases in layoffs.
He said the Fed would consider a 50-base-point rate cut in September if the unemployment rate doesn’t fall and the sell-off in equity markets gets worse.
“For now, we are sticking with our view, held since the April baseline, that the first-rate cut would occur in September and be a 25 basis points cut,” he added.
‘Inter-meeting cut very unlikely’
Mark Dowding, chief investment officer at BlueBay, told Anadolu that the market moves “have much more about technicals than fundamentals.”
Dowding said the data at hand is consistent with a “soft landing” in the US economy, and that there is no “fear of recession, unless we see a bigger equity crash.”
He noted that they believe the Fed will cut rates by 25 basis points each in September, in December, and in the first quarter, adding that an “inter-meeting cut is very unlikely.”
‘Inter-meeting rate cut not expected unless systemic risk emerges’
James Knightly, chief economist at ING International, said in a statement on Tuesday that the Fed will “step on the gas, but market pricing looks aggressive.”
Knightly said July’s weak employment report fueled recession concerns and the Fed needs to make an aggressive response, though he noted that an “inter-meeting rate cut is not expected unless a systemic risk emerges.”
Meanwhile, former Fed economist Claudia Sahm said in an interview with Bloomberg that the US has yet to enter a recession but it is close, though she added that it would be inappropriate for the Fed to act immediately in response to the risks when the markets have already fallen sharply.
*Writing by Emir Yildirim in Istanbul
