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Cailianshe News, August 6 (Editor: Xiaoxiang)Will the Federal Reserve cut interest rates by 50 basis points next month, or will it make an emergency rate cut before the interest rate meeting?

As global financial markets continued to be turbulent over the past few trading days, the previous expectation in the interest rate swap market that the Federal Reserve is expected to cut interest rates by 25 basis points in an orderly manner next month was quickly overturned in a short period of time, and was replaced by more aggressive easing actions widely speculated by industry insiders.

So, what does Nick Timiraos, a famous journalist known as the "New Federal Reserve News Agency", think about the latest changes in market expectations?

In this regard, Timiraos wrote on Monday local time that although Monday's market plunge increased the risk of both recession and more serious accidents in financial markets, for Federal Reserve officials who paved the way for a 25 basis point rate cut at the September meeting last week, the outlook may need to deteriorate further in the coming weeks to force them to respond more forcefully.

The next Federal Reserve monetary policy meeting will be held on September 17-18.Timiraos pointed out that if the weak July non-farm report indicates a worrying new trend, Federal Reserve officials may then discuss whether to start the widely anticipated rate cut cycle with a larger rate cut of 50 basis points.

However, Timiraos does not seem to agree with market speculation that the Federal Reserve may make an emergency rate cut.

He said it would be highly unusual to cut rates between scheduled policy meetings and that the Fed would generally take such a step only if there was a significant deterioration in market functioning, far beyond a stock market crash.

Timiraos pointed to recent views by Steven Blitz, chief U.S. economist at GlobalData TS Lombard, who said, "The bar is really high (for an emergency rate cut between meetings). I think Fed officials would be more willing to say, 'If things continue to develop in this way, there is a possibility of a 50 basis point cut in September.'"

Market panic has eased

It is worth mentioning that although the S&P 500 fell 3% on Monday, its biggest one-day drop since September 2022. But Timiraos also noticed the fading of safe-haven buying in the bond market.

Timiraos said some of theBondsInvestors changed their minds late Monday, with the policy-sensitive 2-year Treasury yield finally reversing its earlier decline - yields fall when bond prices rise.

A report on the health of the U.S. services sector released on Monday also eased concerns about a rapid economic slowdown. Data released by the Institute for Supply Management (ISM) showed that the services index rose 2.6 points to 51.4 in July. An index above 50 indicates that industry activity is expanding.

Timiraos cited the views of industry analysts that market trends show that there is no large-scale flight of investors due to concerns about deteriorating economic fundamentals. Instead, the sell-off that intensified late last week was more technically driven, including the unwinding of crowded trades in Japanese stocks and large technology companies.

The Fed still has time to send signals

Timiraos pointed out that high stock prices and stable income and job growth have long been important engines of U.S. economic expansion. If the continued downturn in the stock market causes companies to cut investment plans or lay off employees, the outlook for the U.S. economy will change. But it may take days or weeks to judge the impact of the stock market decline on the economic outlook.

In terms of the time window, Timiraos said that although the Fed will not meet again for another six weeks, Powell will have the opportunity to express his views on the changing economic outlook at the Jackson Hole central bank annual meeting later this month and take the opportunity to explain the Fed's overall outlook.

The annual meeting of global central banks will be held on August 23. Timiraos believes that the economic and market trends in the next three weeks may affect the tone of Powell's speech at that time.

San Francisco Fed President Mary Daly said on Monday that the Fed "stands ready to act as we need to when we have clarity on what the economy needs us to do, and more information will emerge between now and when we next meet."

Past experience with emergency rate cuts

Timiraos also introduced some previous cases of emergency rate cuts by the Federal Reserve.

He said borrowing costs typically fall in anticipation of future rate cuts, so the Fed has cut rates between scheduled policy meetings in the past to relieve more severe pressures on financial markets from a rapid deterioration in the economic outlook or because the Fed wants to send a surprising signal.

Timiraos pointed out,Since Powell took office as Fed Chairman in February 2018, the Fed has made two emergency rate cuts between regular policy meetings, both of which occurred during the spread of the COVID-19 pandemic in March 2020. In addition, the Fed has historically made emergency rate cuts between policy meetings at the following points:

October 1998: The Federal Reserve cuts interest rates again in an emergency move just weeks after starting a cycle of rate cuts in order to prevent a market crash caused by the bankruptcy of large hedge fund Long-Term Capital Management (LTCM).

January 2001: With technology stocks languishing for months and economic data deteriorating, the Federal Reserve unexpectedly cuts interest rates by 50 basis points that month.

January 2008: The Fed had cut rates by 100 basis points in the fall of 2007, but a rapidly deteriorating economy and huge trading losses at Societe Generale prompted the Fed to cut rates by another 75 basis points in January 2008, a week before its scheduled policy meeting.