Fears of a looming recession have swiftly gripped Wall Street, igniting speculation of an imminent emergency rate cut by the Federal Reserve.
On Monday, the swap market was pricing in a 60% chance of an emergency 25-basis-point rate cut within the next week, according to Bloomberg. This dramatic shift in sentiment was evident in the bond market, where US Treasury yields—closely tied to interest rate expectations—fell to their lowest levels in a year. Specifically, the yield on the 2-year Treasury note plunged by 16 basis points, while the 10-year Treasury note dropped by 10 basis points.
The market’s risk-off posture was triggered by a weaker-than-expected jobs report on Friday. Payroll growth decelerated more than anticipated, and the unemployment rate surged, activating the Sahm Rule. This highly accurate recession indicator signals trouble when the three-month moving average of the unemployment rate surpasses a critical threshold.
These developments have led investors to question whether the Federal Reserve erred by waiting over 28 months from their initial rate hike to ease monetary policy. The debate has intensified, with some market watchers urging the Fed to take bold action in the coming weeks.
Wharton professor Jeremy Siegel has been vocal, pressing the Fed to implement an emergency 75-basis-point rate cut, followed by another 75-basis-point cut at the September policy meeting. Siegel warned that failing to act decisively could lead to market turmoil, arguing that interest rates should be approximately 175 basis points lower than their current levels. “How much have we moved the fed funds rate? Zero,” Siegel stated in a CNBC interview. “That makes absolutely no sense whatsoever.”
“If they are going to be as slow on the way down as they were on the way up, which, by the way, was the first policy error in 50 years, then we’re not in for a good time with this economy,” Siegel added.
Nobel laureate Paul Krugman echoed these concerns, suggesting that the Fed might need to cut rates sooner than planned. “I wasn’t calling for an inter-meeting cut, because that might signal panic. But since we may be seeing a panic anyway, that argument loses its force. Real case for an emergency cut soon,” Krugman posted on X.
Historically, the Fed has implemented rate changes during scheduled policy meetings but has made exceptions during periods of extreme volatility, such as the COVID-19 pandemic or the dot-com crash.
Market expectations for aggressive rate cuts by year-end have surged. The CME FedWatch tool now indicates a 92% chance of a 100-basis-point or greater rate cut by the end of the year, a sharp increase from just 0.2% a week ago.
Goldman Sachs economists have adjusted their forecasts accordingly, raising the odds of a recession to 25%. “We now expect faster cuts because the funds rate looks more clearly inappropriately high,” they noted. “The Fed looks behind, having worried too much about inflation for too long and held steady in July; and the rationale for cutting now includes the more urgent priority of supporting the economy.”
Key Takeaways:
- Emergency Rate Cut Probability: The swap market indicates a 60% chance of a 25-basis-point emergency rate cut within a week.
- Treasury Yields Reaction: US Treasury yields have dropped to their lowest in a year, reflecting recession fears.
- Sahm Rule Activation: A weaker-than-expected jobs report and rising unemployment have triggered a key recession indicator.
- Calls for Bold Fed Action: Influential economists like Jeremy Siegel and Paul Krugman are urging the Fed to cut rates significantly.
- Market Expectations: Investors are betting on substantial rate cuts by year-end, with a 92% chance of at least a 100-basis-point cut.
Conclusion: As recession fears escalate, the spotlight is on the Federal Reserve and its potential response. The market’s call for aggressive rate cuts underscores the urgency of the situation. Investors are closely monitoring the Fed’s next move, which could significantly impact market dynamics and economic stability in the months ahead.
