Federal Reserve Chairman Jerome Powell has been urged to step in and cut interest rates as soon as this week to ease investor fears about a possible recession following last week’s disappointing jobs report and Monday’s big stock market sell-off.
The Dow Jones Industrial Average and the Nasdaq both fell more than 1,000 points at the start of trading on Wall Street Monday.
US markets reacted to Japan’s sell-off with the Nikkei falling more than 12%, its worst one-day performance since the 1987 “Black Monday” crash.
Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania, called on the Fed to immediately cut interest rates by 75 basis points (0.75 percentage points).
“Next month’s September meeting should signal another 75 basis points of cuts, but that’s the bare minimum,” Siegel said.
“The current federal funds rate should be between 3.5% and 4%,” he said. He told CNBC on Monday..
Last week, the Fed ended a two-day meeting leaving interest rates unchanged at 5.25% to 5.5%.
There is precedent for the Fed making emergency rate cuts: In 2001, then-Federal Reserve Chairman Alan Greenspan issued an emergency 50 basis point cut in interest rates after the central bank refused to lower rates at its December 2000 meeting.
Siegel noted last week’s weak jobs report and rising unemployment rate, and said the Fed hasn’t done enough to cut interest rates even as inflation slows from its summer 2022 peak.
“How much have they moved the federal funds rate? Zero,” he said. “It just doesn’t make sense.”
Siegel predicted that if the Fed doesn’t cut interest rates before its September meeting, the market would react negatively.
“If interest rates are as slow to fall as they are to rise, which was the biggest policy mistake in 50 years, this economy is not going to be good,” Siegel said, adding, “Don’t think the Fed knows anything. Since when has the Fed known anything about the economy?”
“The market knows a lot more than the Fed. The Fed has to respond.”
But other analysts were less sure about whether the Fed needed to step in.
“The Fed could ride in on a white horse and save the day with a big rate cut, but the case for a rate cut between meetings looks flimsy,” said Brian Jacobsen, chief economist at Annex Wealth Management in New York.
“These measures are typically reserved for emergencies like COVID-19, and an unemployment rate of 4.3% does not seem like an emergency.”
“The Fed can respond by stopping the reduction of its holdings of Treasury bonds and other debt securities,” he said, which could ease upward pressure on longer-term interest rates.
“At the very least, this may be a symbolic gesture that they are not unaware of what is going on.”
“Sentiment is building… The Fed has waited too long to cut rates and now they’re on the back foot,” said John Lynch, chief investment officer at Comerica Wealth Management in Charlotte.
“While I’m not entirely convinced by the new outlook, one thing is for sure: we’re going to see more volatility,” Lynch said.
Another analyst, Jamie Cox, doesn’t think the stock market crash is a big deal.
“The sell-offs that show up as violent movements in the currency markets are sharp and rapid, but they’re usually very short-lived,” said Cox, managing partner at Richmond, Virginia-based Harris Financial Group.
“Some say this is too late, but I say we should take advantage of this downturn to get some deals.”
Goldman Sachs economist David Mericle sees the likelihood of a recession increasing following Friday’s jobs report, but he also raised his estimate of the likelihood of a recession to 25% from 10%, in part because “the data overall looks good” and “we don’t see any major financial imbalances.”
With post wire
