Global market turmoil sparks speculation on early Fed rate cut

The sharp slowdown in the US job market, which sent global stock markets into turbulent days, has triggered speculation that the Federal Reserve might cut interest rates before its next scheduled meeting in September.

An interest rate futures contract expiring later this month, reflecting expectations for Fed policy, surged to its two-month high earlier this week, showing bets that rates might be lowered by the end of August. However, the odds of an emergency rate cut are still low.

The mandate of the Fed is about employment and price stability, according to Chicago Fed President Austan Goolsbee. 'The law doesn't say anything about the stock market. It's about employment and price stability,' Goolsbee said earlier this week, outlining what the Fed is concerned about.

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Many analysts now believe that the September meeting will feature a half-percentage-point rate cut, but few see any reason the Fed would act sooner. Nationally, chief economist Kathy Bostjancic of Nationwide stressed that none of the data thus far would be justifiable cause for an emergency rate cut and, as such, may give rise to more market panic.
Then, ex-New York Fed President Bill Dudley, previously one of the most vigorous defenders of lower interest rates, said an intermeeting cut was "very unlikely" this week.

It's an event that Fed Chair Jerome Powell will probably provide more colour on at the Kansas City Fed's annual economic symposium later this month in Jackson Hole, Wyoming.

For now, Powell is expected to stay in tune with what he set last Wednesday that a rate cut could be in store for the September meeting pending data.

The decision of the Fed is most likely to depend on upcoming jobs data, inflation, consumer spending, and data for economic growth.

Precedents set in the past have shown that the Fed has only cut interest rates between meetings when there has been a major market disruption that extended beyond the stock market.

In these instances, bond market disruptions directly threatened the larger economy, a situation that is not yet apparent.

Among past in-between meeting rate cuts are those the Fed did in response to the Russian financial crisis and the implosion of hedge fund Long-Term Capital Management in 1998, where it lowered the policy rate by 25 basis points.

Then, in 2001, it came up with two surprise half-point cuts in reaction to the crash of technology stocks, once more in the wake of the September 11 attacks.

The most important intermeeting cuts were those during the global financial crisis of 2008, totalling 125 basis points off the target, and in March 2020, when the Fed slashed rates by 150 basis points as a reaction to COVID-19.