Jeff Sica of Circle Squared Alternative Investments weighed in on the market sell-off, arguing that the problem lies in the credit markets.
Concerns about an impending recession have led some Wall Street economists to Federal Reserve It is likely to approve an unusually large interest rate cut at its next policy meeting in September.
A majority of traders already see an 84.5% chance of a 50-basis-point cut when the Fed meets on Sept. 17-18, according to CME Group, which tracks trades. Just 15.5% think the Fed will approve a quarter-point cut.
“While we don’t believe conditions are ripe for the Fed to make an emergency rate cut, recent market turmoil strengthens the case for a significant 50 basis point cut at the next meeting,” said Joe Brusuelas, chief economist at RSM.
The new forecast comes on the heels of a disappointing July jobs report that showed nonfarm payrolls rose by just 114,000 in July and the unemployment rate unexpectedly rose to 4.3%. The report rekindled fears of an economic slowdown because it triggered the so-called thumb rule, a measure used to signal early signs of a recession.
Wall Street’s fear gauge surges to highest level since 2020 as global turmoil deepens
The Marriner S. Eccles Federal Reserve Bank Building in Washington, DC, June 25, 2024. (Photographer: Ting Sheng/Bloomberg via Getty Images/Getty Images)
The rule states that a recession is likely when the three-month moving average of the unemployment rate is at least 0.5 percentage points higher than its 12-month low.
The unemployment rate over the past three months has averaged 4.13%, 0.63 percentage points higher than the 3.5% forecast for July 2023. The Sarm Rule has accurately predicted every recession since the 1970s.
Stocks fell sharply on Friday following the report, with the S&P 500 posting its worst day since October 2022. The indexes resumed their downward trend on Monday amid growing selling pressure. The Dow Jones Industrial Average fell more than 1,000 points and the tech-heavy Nasdaq Composite Index fell 3.43%. The S&P 500 slid another 3%.
Stock selling continues amid growing recession fears
“With unemployment exceeding the Fed’s end-of-year forecast and core PCE inflation below, we see the balance of risks favoring more aggressive action from the Fed,” UBS analysts wrote in a Friday note. “We have revised our base case to a 50 basis point rate cut in September, followed by 25 basis points each in November and December.”
Federal Reserve Chairman Jerome Powell speaks at a press conference following the Federal Open Market Committee meeting in Washington, DC on July 31, 2024. (Photo by Andrew Harnick/Getty Images/Getty Images)
The slowdown in job growth has also raised questions about whether the Fed has waited too long to cut interest rates, which are currently hovering near their highest levels in 23 years. Policymakers decided to keep rates on hold at their meeting last week but left open the possibility of cutting them in September.
Some investors have speculated that the Fed will be forced to make an emergency rate cut. The Fed rarely cuts rates outside of regular meetings, having done so only seven times to date. The last emergency rate cut came on March 15, 2020, at the start of the COVID-19 pandemic, when the Fed slashed interest rates to near zero.
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Chicago Fed President Austin Goolsbee questioned whether the spike in unemployment and continued volatility in stock prices were enough to justify an emergency rate cut.
“We have to monitor the real economy. The Fed’s mission doesn’t include stabilizing the stock market,” Goolsbee told The New York Times.
