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Speculation that the Federal Reserve will issue an emergency rate cut before its September meeting has swirled in recent days after weaker-than-expected July jobs data spooked investors about the prospect of a recession.
According to the CME FedWatch tool, markets are pricing in 50 basis points of cuts by the central bank's September meeting as the most likely scenario. This means either a 50-basis-point cut will come then, or the Fed will step in to make a 25-basis-point cut in the meantime.
The Fed hiked rates aggressively starting in 2022 as inflation surged alongside the reopening of the global economy. Now, after a year of holding rates steady between 5.25%-5.5%, Fed officials are trying to achieve a soft landing by keeping the economy out of recession while also bringing down inflation. With inflation largely under control, the Fed is expected to slash rates to restimulate the economy and stave off a slowdown in the labor market and consumer spending.
July's job report came in cooler than expected, with the US economy adding 114,000 jobs. The unemployment rate also rose to 4.3%, triggering the renowned Sahm Rule recession indicator, which has a perfect track record in identifying downturns in real time.
The underwhelming data — though likely impacted by Hurricane Beryl — helped spark a sell-off on Friday that carried into Monday as the Bank of Japan's surprise rate hike also fueled selling.
The heightened uncertainty has caused some to wonder whether the Fed will take extraordinary measures and cut rates earlier than expected.
But is that a realistic scenario? We've compiled views from five experts below.
Lachman thinks the Fed should have cut rates at its July meeting amid growing recession risks but said that issuing an emergency cut before September would do more harm than good.
"The Fed could cut interest rates mid-meeting but that would be because the sky was falling. But if the sky is not falling, the Fed doesn't want to give the impression that the sky is falling," Lachman told Business Insider on Tuesday.
"I think that what they should do, because they're behind the curve, instead of going 25 basis points like would be the normal thing for them to do in September, they should go 50."
Muhlenkamp told Business Insider on Monday that the Fed isn't too preoccupied with how the stock market performs — especially with recent record highs — and, therefore, isn't likely to cut rates early.
"For all the excitement happening in the markets, I don't think the Fed is going to get too concerned until something serious starts bleeding over into the mainstream economy," he said.
"They're happy to let the markets kind of correct to the new vision of the future," he added.
Shepherdson, like Lachman, said an emergency cut is unlikely as it could backfire in terms of the message it sends to investors.
"More often than not, Fed Chairs wait even when they expect to ease. Three-in-four easings in the last 30 years have occurred at scheduled meetings," he said in a client note on Monday. "Previous Chairs probably have worried that rushing to ease would reinforce fears that the economy is in trouble. Mr. Powell also would make a mockery of his statement in last week's press conference that the FOMC '...will be data dependent but not data point dependent' if he reacted to one soft employment number."
The economy or the stock market would have to deteriorate more substantially for the Fed to step in early, he said.
"It would take only a little more weak economic data, or an intensification of financial market stress, for the Fed to get on the front foot and ease this month. If the Fed chooses to act early, we think policymakers would opt for 50bp," Shepherdson wrote.
Tomicki told Business Insider that he believes recession fears are actually not the main driving force behind the stock-market volatility, and so the Fed will not need to cut.
"I believe the current sell-off has its origins in the unwinding of the Japanese Yen carry trade and it should not influence the Fed's decision," Tomicki said in an email to Business Insider.
"In 1998, the Fed did an emergency rate cut in response to the Asian financial crisis even though domestic US conditions were strong," he continued. "This rate cut, in 1998, set up the markets for a crazy two years in 1998-1999 and the overinflation of the internet bubble and the subsequent crazy. It is important that the Fed does not repeat the mistakes of the past and does not respond to every hiccup in the markets."
Sheehan said the recent jobs data wasn't poor enough to justify rate cuts, and that investors ought to look at current data in context.
"It's pretty extreme events when the Fed does emergency cuts," Sheehan told Business Insider.
"It's important to keep perspective on where we are right now," he continued. "The S&P's still up something like 9% year-to-date. And yes there's a disappointing employment number, but unemployment is still running at 4.3%. So these are all pretty manageable numbers."
He added: "We're not seeing a compelling case for why they can't wait the six weeks until the September meeting."
