Stop trying to get emergency rate cuts done!
The combination of a sharp drop in global stock markets on Monday and disappointing employment data on Friday The Federal Reserve is Far Behind Again Interest rates will need to be cut sharply and quickly to avoid a sharp economic downturn.
Wharton’s Jeremy Siegel on monday reach peak panic He called on the Federal Reserve to immediately cut the federal funds rate by 75 basis points, followed by another 75 basis points at its September meeting. “And that’s the bare minimum,” Siegel told CNBC’s Joe Kernan.
“The fed funds rate should be between 3.5% and 4% right now,” Siegel said.
Paul Krugman On Monday, it also pushed for emergency cuts.
Therefore, while I have been advocating for a rate cut (certainly 50% in September), I have not called for a cut between meetings, as that could be a sign of panic.
But that argument loses steam because panic is likely to set in either way — the real reason emergency cuts are needed immediately.
— Paul Krugman (@paulkrugman) August 5, 2024
Barring some sort of economic crisis, an emergency rate cut in August is highly unlikely. The Federal Reserve rarely cuts rates outside of regular Federal Open Market Committee (FOMC) meetings, and when it does, it usually does so only when a cut is truly needed. Emergencies in the economy and financial marketsCurrently, neither condition exists.
History has shown that Fed rates are not cut between meetings unless there is a clear emergency.
In a client note on Tuesday, Bank of America’s Michael Gapen Here’s a look back at the nine times the Fed has made between-meeting policy changes since the Great Crash of 1987. History shows that the Fed only makes between-meeting policy changes in very clear emergency situations, such as the collapse of an asset price bubble in 2001, structural events like the 2008 global financial crisis, acts of war (9/11), and recent pandemics.
It is very difficult to say whether what is happening now corresponds to that. First, The employment numbers weren’t that bad.Employment increased by 114,000 in July, only 66,000 fewer than expected. Employment growth is low outside of a recession, but not extremely low. Employment increased by 108,000 in April, but quickly doubled the following month. By most estimates, the economy only needs to add about 100,000 jobs to keep up with population growth. The three-month average employment gain is now 170,000, above the historical average.
The unexpected rise in the unemployment rate should probably be seen as a normalization after a very long period of extremely low unemployment. Therm Rule ThresholdThe Sam rule, which shows a three-month moving average that is 50 basis points above the lowest three-month average over the past 12 months, is not considered by even its creator to be an indication that we are in a recession. Perhaps the Sam rule will simply join a long line of once-reliable recession indicators that are now telling us that the post-pandemic economy is behaving differently than the pre-pandemic economy.
When the thumb rule threshold is exceeded, You are already in a recessionThis isn’t a warning sign, it’s a wake-up call that the economy is already in recession. Is this now plausible? The manufacturing survey shows that manufacturing is shrinking, but the services report released yesterday beat expectations. The Atlanta Fed’s GDPNow index shows the economy growing at 2.9% for the year.
The market is already recovering
Monday’s sudden sell-off was surprising, The market regained most of that on Tuesday.In any case, according to Bank of America research, the market typically experiences at least one 10% correction and three 5% declines per year. Larger declines of 15% or more occur on average about once every two years. The last correction occurred in October 2023, so it was due. This sell-off was not an indication of an emergency, but rather a sign that the market was behaving normally.
Also, A reassuring sign for yesterday’s sellingRiskier stocks sold off more than safer ones. Companies with higher price-to-earnings ratios fell more than those with lower price-to-earnings ratios. Bonds rose while stocks fell. The stock market decline was unpopular, but there was nothing in the functioning of markets on Monday that suggested any emergency.
Another reason to be skeptical that the Fed will cut rates between meetings is that The Fed has less drastic ways to ease its monetary policy stance.By signaling that it plans to cut rates in September and is prepared to do so in the coming months, the Fed can lower longer-term interest rates, which actually influence economic behavior. Jackson Hole The shindig is the perfect forum for the Fed to deploy its communications tools to provide “negotiated easing” in lieu of rate cuts.
Could things get worse and lead to earlier rate cuts? Of course. But it would take more than one bad jobs report and a temporary market sell-off to send the Fed into emergency mode.
