Could the US economy continue to shrink with interest rates at their highest levels in two decades? It’s a question that is weighing on all financial markets after July’s weak jobs report and the sell-off in world currencies that followed.
After its meeting last week, the Federal Reserve kept interest rates at 5.25 percent to 5.5 percent. The July jobs report was released shortly after the meeting, showing slower-than-expected growth and a rise in the unemployment rate to 4.3 percent. It is the highest unemployment rate since October 2021, although it is still the lowest number in history. What followed was a worldwide frenzy in the stock markets. As of Monday, Japan’s Nikkei is down more than 12 percent, while the US stock market is down more than 2.5 percent.
Many economists and investors expect the Fed to cut interest rates at its September meeting. However, with the meeting seven weeks early, some economists are now speculating that the Fed may announce an emergency rate cut early due to growing fears of a recession. Bankrate’s Second Quarter Economic Indicators Survey found that there is a 32 percent chance that the economy will be in recession this time next year.
Emergency rate reductions are rare and often occur during extreme emergencies. In the past two decades, the Fed has adopted emergency rate cuts only seven times: three in 2001 after the terrorist attacks of September 11 and during the stock bubble; two during the Great Depression; and two during the COVID-19 pandemic.
Here’s what experts say about the possibility of reducing the eighth emergency rate.
Will the Fed make an emergency rate cut? Economists and financial experts have different opinions
As fears of a recession are growing, many economists and financial experts are divided on whether the Fed will implement an emergency rate cut before the next meeting in September.
For most of the past two years, the Fed has been raising interest rates to control the rate of inflation that has plagued consumers since the start of the COVID-19 pandemic. That rate increase has been offset by a reduction in interest rates, from 9.1 percent in June 2022 to 3 percent in June 2024. The central bank is now grappling with the question of when to bring it back. If it keeps rates high for too long, it could push the economy into recession.
Greg McBride, CFA and Bankrate’s chief financial analyst, said the weaker-than-expected jobs report and stock market sell-off were not enough to justify the Fed cutting rates between meetings.
“It’s going to take more than 114,000 new jobs and regular and backlogged repairs to do it,” McBride says.
Mark Hamrick, senior economist at Bankrate, said the U.S. economy “is nowhere near the kind of crisis that would prompt the Fed to cut rates between meetings.”
In order for the Fed to do that, Hamrick said the markets would need to take it to the point where businesses and consumers would have less access to money and credit, as was seen at the onset of COVID-19. . epidemic and during the financial crisis of 2007-2008.
“It could be argued that the current level of their rate is very difficult and needs to come down,” says Hamrick. “That’s why expectations are high that there may be a rate cut in September. “
However, two prominent economists say the stock market turmoil could be reason enough to cut the Fed’s emergency rate. Paul Krugman, a Nobel laureate in economics and New York Times Opinion columnist, wrote in X that he did not expect a rate cut from the Fed because it would cause more volatility, but at an already high level. among investors, he says there may be “a real case for emergency mitigation in the near future.”
“So, although I have argued for reducing the rates – 50 in September indeed – I did not call for reducing the meetings, because that might show fear,” Krugman wrote in X. ” But since we’re likely to see panic anyway, that argument falls flat.”
Jeremy Siegel, an economist at the Wharton School of the University of Pennsylvania, expressed concern about the Fed’s recent decision to keep interest rates steady and called for an emergency cut of 75 basis points to Fed funds rate during an interview with CNBC’s “Squawk.” A box.” Siegel also predicts another 75-point rate cut at the Fed’s September meeting.
In that interview he said: “We have gone 90 percent to where we were set in terms of the rate of inflation.” “We have removed the unemployment target [4.2 percent]. These are two goals clearly stated by the Federal Reserve. How much did we raise the Fed funds rate? Zero.”
Sarah Hunt, chief market analyst at Alpine Saxon Woods, said in a Bloomberg TV interview that if the Fed cuts interest rates suddenly, it could scare consumers that the economy is in worse shape than expected. .
“The Fed’s worries about reducing the emergency or getting too tight now will only worry people more, in a way that won’t help,” Hunt said in an interview. “These markets need to stabilize.”
In an interview with CNBC’s “Squawk Box”, Chicago Federal Reserve President Austan Goolsbee would not say whether the central bank would make an emergency rate cut, but acknowledged that the Fed has been in a “restrictive position” regarding and its financial policy. He emphasized that the Fed will step in when the economy begins to slow down.
You only want to have such restrictions if you are afraid of overheating. The data to me doesn’t look very hot,” Goolsbee said in an interview. “It’s the market’s job to respond, and the Fed’s job to act.”
3 Reasons Why There May Not Be an Emergency Rate Cut by the Fed
Several economists and financial experts expect the Fed to cut interest rates, but many do not. Here are three reasons why the Fed may not intervene before its next meeting in September.
- It would worry the Americans even more. A decrease in the emergency rate could cause more fear among Americans and cement concerns that the US is headed for a recession. The Fed is trying hard to increase employment, stabilize prices and maintain financial stability, so cutting the meeting rate may have the opposite effect that the Fed wants.
- Some volatility in the stock market is not enough to prompt an emergency Fed rate cut. Markets move faster and change more than financial policy. Due to weak economic data, many experts believe that the volatility of the stock market is exaggerated. However, some experts argue that the fear is not enough for the Fed to act and implement emergency rate cuts.
- The economy is not showing enough signs of suffering. Although there has been some weak economic data recently, it is not enough to sound the alarm. The economy added fewer jobs than expected in July and the unemployment rate rose to 4.3 percent, but that’s still a historic low. Inflation fell to 3 percent in June, the lowest since the start of 2021, according to the latest CPI report. Real domestic product (GDP), a key indicator of economic growth, rose 2.8 percent in the second quarter of 2024, according to data from the Bureau of Economic Analysis.
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