Will the Federal Reserve directly cut interest rates by 50 basis points next month, or will it cut interest rates urgently before the meeting?
With the continued turbulence in global financial markets over the past few trading days, the previous expectation in the interest rate swap market that the Federal Reserve would cut interest rates by 25 basis points next month has been quickly overturned, replaced by more aggressive easing actions widely speculated by industry insiders.
So, how does renowned journalist Nick Timiraos, known as the "New Federal Reserve News Agency," view the latest changes in market expectations?
Regarding this, Timiraos wrote on Monday local time that although the market crash on Monday increased the risk of economic recession and more serious accidents in the financial market, for Federal Reserve officials who had already paved the way for a 25 basis point interest rate cut at the September meeting last week, the outlook may need to further deteriorate in the coming weeks to force them to make a stronger response.
The next Federal Reserve monetary policy meeting will be held on September 17-18. Timiraos pointed out that if the overall weak July non farm payroll report heralds a worrying new trend, Federal Reserve officials may discuss whether to initiate the widely anticipated rate cut cycle with a larger 50 basis point cut.
However, Timiraos does not seem to agree with the speculation in the market that the Federal Reserve may urgently cut interest rates.
He said that it would be very unusual to cut interest rates during the scheduled policy meeting interval. Generally speaking, the Federal Reserve will only take such measures when there is a significant deterioration in market function, far beyond the stock market crash.
Timiraos mentioned the recent views of Steven Blitz, Chief US Economist at GlobalData TS Lombard. Blitz believes that the threshold for emergency interest rate cuts during the interval between meetings is really high. I think Fed officials would be more willing to say, 'If things continue to develop like this, there is a possibility of a 50 basis point rate cut in September.'
The market panic has eased somewhat
It is worth mentioning that despite a 3% drop in the S&P 500 index on Monday, the largest single day decline since September 2022. But Timiraos also noticed a decline in safe haven buying in the bond market.
Timiraos said that some bond investors who had once heavily bet on interest rate cuts changed their minds later on Monday. The yield of two-year US treasury bond bonds, which are sensitive to policy, finally reversed the previous decline - the yield will decline when the bond price rises.
The report on the state of the service industry released by the United States on Monday also eased people's concerns about a rapid economic slowdown. According to data released by the Institute for Supply Management (ISM), the service sector index rose 2.6 points to 51.4 in July. An index above 50 indicates that industry activity is expanding.
Timiraos, citing industry analysts, believes that market trends indicate that there has not been a significant exodus of investors due to concerns about deteriorating economic fundamentals. On the contrary, the intensified sell-off late last week was more driven by technical factors, including crowded trading closures of Japanese stocks and large tech companies.
The Federal Reserve still has time to release signals
Timiraos pointed out that high stock prices and stable income and employment growth have long been important engines of economic expansion in the United States. If the sustained downturn in the stock market leads to companies cutting investment plans or layoffs, the outlook for the US economy will change. But it may take several days or weeks to assess the impact of a stock market downturn on the economic outlook.
From a time window perspective, Timiraos stated that although the Federal Reserve will not meet again for another six weeks, Powell has the opportunity to express his views on the constantly changing economic outlook at the Jackson Hole Central Bank Annual Meeting later this month, taking the opportunity to elaborate on the overall outlook of the Federal Reserve.
The global central bank annual meeting will be held on August 23rd. Timiraos believes that the economic and market trends in the next three weeks may affect the tone of Powell's speech at that time.
San Francisco Federal Reserve Bank President Mary Daly stated on Monday that the Fed is "ready to act as needed when we have a clear understanding of what the economy needs us to do, and more information will emerge from now until our next meeting.
Past experience of emergency interest rate cuts
Timiraos also introduced some cases of emergency interest rate cuts by the Federal Reserve in the past.
He said that borrowing costs usually decrease due to expectations of future interest rate cuts. Therefore, in the past, the Federal Reserve lowered interest rates between scheduled policy meetings in order to alleviate the more severe pressure faced by financial markets due to the rapidly deteriorating economic outlook, or because the Federal Reserve hoped to send its signals unexpectedly.
Timiraos pointed out that since Powell took office as the chairman of the Federal Reserve in February 2018, the Federal Reserve has conducted two emergency interest rate cuts between regular policy meetings, both of which occurred during the spread of the COVID-19 in March 2020. In addition, the Federal Reserve has conducted emergency interest rate cuts between policy meetings at the following points in history:
In October 1998, the Federal Reserve urgently cut interest rates again a few weeks after starting its rate cutting cycle, with the aim of preventing market collapse caused by the bankruptcy of large hedge fund Long Term Capital Management (LTCM).
In January 2001, as technology stocks performed poorly for several months and economic data continued to deteriorate, the Federal Reserve unexpectedly lowered interest rates by 50 basis points that month.
January 2008: The Federal Reserve cut interest rates by 100 basis points in the fall of 2007, but the rapid deterioration of the economy and huge trading losses at Societe Generale prompted the Fed to urgently lower interest rates by another 75 basis points in January 2008 (one week before the scheduled policy meeting).