This comes at a time when Federal Reserve policymakers are studying the economic situation, especially after the emergence of data indicating a decline in the labor market and a decrease in job openings, which some may interpret as an indication of an imminent recession.
Under these circumstances, economists are calling for a quarter-point cut in interest rates to avoid confusing markets and sending false signals about the need for additional stimulus, warning that a deeper half-point cut would be unwarranted and could undermine confidence in financial markets.
Although most analysts expect a 25 basis point cut at the Federal Reserve’s September 17-18 meeting, the increased expectations for a larger 50 basis point cut, in light of recent economic data, raises many questions about the Fed’s strategy and the accuracy of its estimates of the economic situation.
Is the Fed misjudging the size of the rate cut needed? Is it overestimating the need for stimulus? Or is it facing a complex dilemma between mitigating the economic slowdown and avoiding false signals for a rate hike?
According to a report published by CNBC and viewed by the Sky News Arabia Economy website, George Lagaris, chief economist at Forvis Mazars, warned the US Federal Reserve against cutting interest rates by half a point, saying, “While no one can guarantee the size of the interest rate cut by the Fed at its next meeting, I tend to side with the camp calling for a quarter-point cut.”
“I don’t see the urgency of a 50-point cut, because that would send the wrong message to the markets and the economy,” Lagares added. “There is a slowdown happening, there is no doubt about that, but I think we are a long way from a recession. I understand that there is a slight decline in the labor market, and some of that is due to an increase in supply rather than a decrease in demand.”
Lagares isn’t the only one warning the Fed against a half-point cut this month. “There is absolutely no need for the Fed to cut by 50 basis points at the September meeting,” said Mohit Kumar, chief financial economist for Europe at Jefferies.
Interest rates in the world’s largest economy range between 5.25 and 5.5 percent, with the US Federal Reserve keeping interest rates at their highest levels in 22 years for months to limit lending and calm rising prices.
The American network report stated that the data published on Wednesday revealed that “job openings in the United States fell in July to their lowest level in more than three years, in what is seen as another sign of stagnation in the labor market.”
Market participants are firmly pricing in a rate cut at the Fed’s next policy meeting, although bets for a half-point cut increased after the release of the Job Openings and Labor Market Turnaround, or JOLTS, report.
According to the CME Group’s FedWatch tool, traders see a 73 percent chance the Fed will cut rates by 25 basis points this month, and a 27 percent chance it will cut them by 50 basis points.
Realistic assumptions
Speaking to Sky News Arabia Economy, economic and financial expert Hussein Al Qamzi said: “The assumptions seem quite realistic. Central banks operate in an environment that requires extreme caution regarding the signals they send to the markets. Excessive interest rate cuts without clear justifications can create panic in the markets, and with no clear signs of an economic recession, the Fed should be more cautious.”
On the other hand, there may be expectations among some market players for a bigger cut due to sluggish economic indicators. Therefore, a small cut may disappoint investors who are expecting a bigger move, he said.
Economic and financial analyst Al Qamzi believes that the Federal Reserve must take into account both the markets’ reading of signals and the reading of actual economic data when making its decisions, as the effects of signals sent to the markets cannot be ignored, especially since investors’ reactions may lead to undesirable fluctuations in the market, which may negatively affect the economy.
Al Qamzi stressed that there must be a balance between reading the data and reading the market’s reactions, noting that the Fed cannot completely ignore the markets, but it must also not be a prisoner to them, because its decisions must be based on the data, and at the same time, it must take into account how the markets receive them.
Dangerous game
“Is the Fed playing a dangerous game? It faces a difficult task to balance. With inflation stubbornly high and the economy showing signs of weakness, pressure is mounting to cut interest rates. But the important question is whether the Fed is overestimating, misjudging the need for stimulus, and risking false signals in a fragile economic environment?” Ali Hamoudi, financial expert, CEO and Chief Investment Officer at ATA Global Horizons, told Sky News Arabia Economy.
Hamoudi sees the case for cutting interest rates as largely based on concerns about the weakness of the economy. Recent economic data has shown signs of slowing growth, with consumer spending falling and business investment faltering. In theory, cutting interest rates should stimulate borrowing, boost investment, and perhaps stimulate economic activity.
However, the Fed faces a delicate dilemma. Cutting rates could send the wrong signal to the market, suggesting that the Fed is more concerned with near-term growth than inflation expectations. This could fuel inflation expectations and undermine the Fed’s credibility in controlling prices, he said.
“Let’s remember that the Fed’s primary mission is to maintain price stability and full employment in the US labor market,” the financial expert added. “While lowering interest rates may help in the short term, it could backfire in the long run by exacerbating inflation and pushing the economy off track.”
Uncertainty in the global economic landscape adds complexity
“The uncertainty in the global economic landscape is further complicating the situation, as the war in Ukraine, ongoing supply chain disruptions, and geopolitical tensions continue to add volatility to the market,” Hamwi explains. “In this environment, any decision by the Fed carries a high risk of unintended consequences.”
“The Fed’s task is to navigate a difficult path,” concludes the CEO and CIO of ATA Global Horizons. “While the economy may benefit from a short-term boost, cutting rates could pave the way for a more painful adjustment later. The Fed’s decision will depend on its assessment of the risks and its ability to balance the need for stimulus with the possibility of sustainably combating inflation. The coming months will be critical for the Fed and the economy. How the Fed navigates this dilemma will have significant implications for the path of the economy, and for investor and consumer confidence alike.”
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