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Source: North American Business Telecommunications

After U.S. stocks plummeted for three consecutive trading days, the market pinned its hopes on an emergency rate cut by the Federal Reserve.

According to well-known media reports, on Monday, the swap market once estimated that there was a 60% chance of an emergency rate cut of 25 basis points within the next week.

However, the Fed rarely cuts or raises interest rates outside of scheduled meetings, and its last emergency move was triggered by the coronavirus pandemic.

Wall Street was suddenly gripped by recession fears, and the sudden shift in sentiment could be seen in the U.S. bond market, with Treasury yields, which are tied to interest rate expectations, falling to their lowest level in a year. On Monday, the 2-year Treasury yield plunged 16 basis points, while the 10-year Treasury yield fell 10 basis points.

Investors went into risk aversion after an unexpectedly weak U.S. jobs report on Friday. Wage growth slowed more than expected last month, while the unemployment rate surged. That triggered Sam's Rule, a highly accurate recession indicator that warns when the three-month moving average of the unemployment rate crosses a key threshold.

A growing number of investors are wondering whether the Federal Reserve made a mistake by waiting more than 28 months after its first rate hike to ease monetary policy, with some urging the Fed to take emergency measures in the coming weeks.

In a media interview on Monday, Wharton professor Jeremy Siegel urged the Fed to cut interest rates by 75 basis points in an emergency, followed by another 75 basis points cut at the September policy meeting. Otherwise, the market may not react well, as interest rates should be about 175 basis points lower than they are now.

Siegel added: "This is the first policy mistake by the Fed in 50 years, and our economy is in trouble."

When asked if the stock market's decline was due to the rising likelihood that Kamala Harris will win the November presidential election, Siegel reiterated that the problem lies with the Federal Reserve and not the upcoming presidential election or geopolitical tensions as some commentators have suggested.

“I don’t think this election, Iran or Japan are the cause of the slowdown. I think the Federal Reserve building in Washington, D.C. is the cause,” Siegel said.

Siegel believes the federal funds rate should be between 3.50% and 4%.

Siegel has long criticized Federal Reserve Chairman Jerome Powell for raising interest rates too late in 2021 and 2022 amid inflation, and now he believes Powell is making the exact same mistake by waiting too long to cut rates.

Nobel laureate Paul Krugman also said there was panic selling in the stock market, justifying an emergency rate cut.

“I wasn’t calling for a rate cut during the Fed recess because that might have meant a panic. But now that we might have faced a panic anyway, there is a real case for an emergency rate cut,” he said in a post on X.

The Fed typically implements rate changes only during scheduled policy meetings. But during periods of extreme volatility, such as the coronavirus pandemic or the dot-com bubble burst, the central bank has made emergency rate hikes.

Markets have also increased expectations for a bigger-than-expected rate cut by the end of the year. Investors see a 92% chance that the Fed will cut rates by 100 basis points or more by the end of the year, up from the 0.2% chance they were pricing in a week ago, according to the CME FedWatch tool.

"We now expect the Fed to cut rates sooner as the funds rate looks more clearly too high," Goldman Sachs economists said in a note Monday, raising the odds of a recession to 25%. "The Fed has been too concerned about inflation for too long and held off in July; now the case for a rate cut is strong and supporting the economy becomes a more pressing priority."

JPMorgan strategist Mislav Matejka said in a report on Monday that the Fed's failure to cut interest rates in the first half of the year will put pressure on economic growth in the second half of the year, and any future rate cuts by the Fed may not be enough to support economic growth.

“The Fed will start easing, but it will be more reactive, in response to slower growth, meaning it may be behind the curve — it may not be enough to drive a rebound,” Matka said.

However, while the Fed may be “behind the curve,” this may be deliberate.

That’s because Powell wants to convince markets that he remains determined to keep inflation in check even in the face of a potential recession, just as former Fed Chairman Paul Volcker did in the 1980s.

“There is a growing consensus that the Fed waited too long to cut rates and is now behind the times,” said John Lynch, chief information officer at Comerica Wealth Management.

On August 5, Chicago Fed President Goolsbee said that the Fed's job is not to react to a month of weak labor data. He said there are some indicators that are worthy of vigilance, but economic growth continues to remain at a fairly stable level. When asked about the emergency rate cut called for by the market, Goolsbee said that options including rate hikes and rate cuts have been on the table, and if the economy deteriorates, the Fed will take measures to repair it.