On July 31, 2024, Federal Reserve Chairman Jerome Powell answered questions from reporters at a press conference following the Federal Open Market Committee meeting at the William McChesney Martin Jr. Federal Reserve Building in Washington, DC.
Andrew Harnick | Getty Images
In the market’s view, the Fed finds itself either well-positioned to head off a recession or doomed to repeat its recent mistakes – by the time it sees the coming storm until it’s too late.
how about chairs Jerome Powell The reaction of his colleagues at the central bank may go a long way in determining how investors respond to such a volatile environment. Wall Street has been in a frenzy over the past few days Tuesday’s relief rally It eased some of the damage done since recession fears intensified last week.
“All in all, there is no recession now, but if the Fed doesn’t act, it will be by the end of the year,” Steven Blitz, chief U.S. economist at TS Lombard, said in a note to clients. “But they will, starting with a rate cut of half a percentage point in September and announcing it at the end of August. “
Blitz’s comments are representative of the prevailing sentiment on Wall Street – few believe a recession is inevitable unless the Fed takes no action. Then the odds will go up.
disappointing Economic data The most recent concerns are The Fed missed it a chance at last week’s meeting Even if interest rates are not cut completely, a clearer signal must be sent that easing policies are coming. It brought back memories of the not-so-distant past, when Fed officials deemed a surge in inflation in 2021 “transitory” and were ultimately forced to issue a series of tough rate hikes.
Now, with Weak employment report Starting in July, as concerns about an economic downturn intensified, the investment community hoped that the Fed would take strong action before the opportunity was missed.
Traders expect a half-percentage point interest rate cut in September to be highly likely, followed by aggressive easing. Judging from the 30-day federal funds futures contract, the Fed’s short-term borrowing rate may fall by 2.25 percentage points by the end of next year. The Fed’s current key interest rate target is between 5.25% and 5.5%.
Citigroup economist Andrew Hollenhorst wrote: “The unfortunate reality is that a slew of data confirms the stark signal that rising unemployment is now sending—that the U.S. economy is, at best, facing a recession. The risk of a recession, in the worst-case scenario, is one already in recession: “Next month’s data could confirm a continued slowdown, with a possible rate cut (by half a percentage point) in September and possibly a rate cut during the meeting. “
Emergency production cuts are unlikely
Despite the recent sell-off, the economy is still creating jobs, stock market averages are near all-time highs, and the odds of an emergency rate cut between now and the Open Market Committee meeting on September 17-18 are, to say the least, negative.
Still, the fact that people are even talking about it shows how serious concerns about a recession are. Bank of America said the Fed has implemented only nine such rate cuts in the past, and all of them came under extreme pressure.
“If the question is, ‘Should the Fed consider cutting rates now during the meeting?’, we think history tells us, ‘No, it’s not even close,'” said Michael Gapen, an economist at Bank of America. .
Still, in the absence of catalysts for an inter-meeting rate cut, the Fed is expected to cut rates almost as quickly as it raised rates between March 2022 and July 2023. Delivers the expected keynote policy speech at the annual meeting. Powell is expected to hint at how the easing path will unfold.
Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities, predicts that the Federal Reserve will cut interest rates by 3 percentage points by the end of 2025, which is more aggressive than the current market outlook.
“Go big or go home. The Fed has made it clear that interest rates are too high. Why have they been slow to unwind the tightening?” he said. “If for no other reason than rates are not at the right level, they will cut rates very quickly. Why wait?”
Still, LaVolnia doesn’t believe the Fed is in a life-or-death battle with the recession. However, he noted that “normalization” Yield curve invertedor returning yields on longer-dated securities to levels higher than those on shorter-dated securities, would be an integral factor in avoiding an economic contraction.
Over the weekend, Goldman Sachs raised some eyebrows when it raised its recession forecast, but only from 15% to 25%. Still, the bank did note that one of the reasons it doesn’t think a recession is imminent is that the Fed would have enough room to cut interest rates — by 5.25 percentage points if necessary — let alone restart its bond purchases, known as quantitative The ability to plan.
Still, any blip in the data, such as Friday’s unexpected decline in non-farm payrolls, could quickly trigger recession talk.
“The Fed is now behind the economic curve just as it was behind the inflation curve in 2021-2022,” David Rosenberg, economist and strategist and founder of Rosenberg Research, wrote on Tuesday. He added that expectations for a rate cut have increased ” Smacks of a true recession scenario, as the Fed rarely does this in the absence of an official recession – either entering a recession, already in it, or limping out of it.
