In CNBC’s article “Fears grow that Fed is too late in cutting rates as bets rise for a half-point easing at next meeting,” Jeff Cox quotes Yung-Yu Ma, chief investment officer at BMO Wealth Management, saying, “A 50 basis point Fed cut in September is clearly justified as the labor market is now showing clear signs of softening The Fed is already falling behind the curve and rates are overly restrictive — a 50 basis point cut in September would only be catching-up to, rather than getting ahead of, the curve.” Recent changes in market sentiment about Federal Reserve interest rate cuts reflect rising worries about a possible economic slowdown. Before a disappointing jobs report came out on Friday, traders mostly expected a small 0.25% rate cut for September. However, the report has shifted this view. The Bureau of Labor Statistics revealed that only 114,000 jobs were added in August, far short of the predicted 185,000, and the unemployment rate rose to 4.3%, the highest since October 2021. This has led to expectations for a larger 0.50% rate cut to address the weaker labor market.
The market’s reaction to the jobs report was quick and strong. The S&P 500 dropped more than 2.5%, and Treasury yields fell sharply, with the 2-year note yield dropping to 3.91%. Futures for Fed funds have increased, showing strong anticipation of a half-point rate cut in November, with more cuts expected by the end of the year. The urgency is heightened by the Sahm Rule, which uses rising unemployment rates as a signal for potential recessions, suggesting a downturn could be coming unless the Fed acts decisively. Despite these signs, some economists, like Preston Caldwell from Morningstar, think the market might be overreacting, though they still support a rate cut based on current conditions.
Critics argue that the Federal Reserve’s hesitation might mean it’s not responding quickly enough to economic changes. David Rosenberg of Rosenberg Research believes the Fed’s delay is similar to past delays in dealing with inflation. Fed Chair Jerome Powell has acknowledged that a rate cut may be needed soon but hasn’t yet decided it’s necessary. As Fed officials get ready to make public statements, they will face pressure to address these concerns and clarify their policy stance given the worsening economic indicators.
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