Should Fed Make An Emergency Cut Before September Meeting? 'No, Not Even Close,' Analyst Says

Tuesday marked a return to normalcy in interest rate markets after recent shockwaves that even led to speculation of an intermeeting or emergency rate cut ahead of the scheduled meeting on Sept. 18.

On Monday, during a CNBC interview, the possibility of an emergency rate cut was not dismissed by dovish voices like Chicago Fed President Austan Goolsbee, who suggested that all options are on the table, adding to the suspense among investors.

According to Polymarkets, the implied probability of a Fed emergency rate cut in 2024 jumped to 58% on Monday and then dropped sharply to 14% by Tuesday.

Interest rate futures, as tracked by the CME Group’s FedWatch tool, currently assign a 64% chance of a 50-basis-point rate cut in September, down from almost a 100% chance a day earlier.

George Smith, portfolio strategist for LPL Financial, highlighted the shift in market sentiment: “After an extended period of a ‘bad news is good news’ market, with participants believing data on a slowing economy would give the Federal Reserve clearance to cut interest rates, we appear to have abruptly moved to a ‘bad news is bad news’ environment.”

Will the Fed Make An Emergency Rate Cut? History Advises Against Betting on It

While speculation about emergency Fed rate cuts continues to swirl, the historical analysis suggests that stringent conditions are required for such drastic measures.

Bank of America economist Michael Gapen highlighted that these cuts typically occur under extreme economic or financial stress, such as global pandemics like COVID-19, significant asset price corrections like the tech bubble burst, systemic crises like Lehman’s collapse, and acts of war such as the 9/11 attacks.

Declines in equity markets have sometimes triggered emergency rate cuts, but these declines are typically substantial. For instance, the S&P 500 fell by approximately 30% during the 1987 crash, around 40% during the tech bubble burst, 33% during the COVID-19 pandemic, and 55% during the Global Financial Crisis.

After the 9/11 attacks, the S&P 500 dropped by only 15%, but the economy had already been shedding jobs for eight consecutive months.

Gapen stressed that historical precedents set a high threshold for intermeeting cuts, and current conditions do not meet this bar.

He stated, “History suggests the bar for intermeeting cuts is extremely high and that conditions on the ground today do not warrant such action. Could we get there? Sure…we cannot predict the future, and our view on the fundamental health of the economy and vibrancy of financial markets may be misplaced. But if the question is, ‘should the Fed consider an intermeeting cut now?’, we think history says, ‘no, not even close.'”

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• Market Bets On Fed’s Next Move: Is 50-Basis-Point Cut In September A Done Deal?

Image created using artificial intelligence via Midjourney.