Should the Federal Reserve cut interest rates urgently to save the stock market? Analyst: The US is not in a recession yet, emergency rate cuts would be a mistake

According to the Zhitong Finance and Economics APP, last week, the Federal Reserve abandoned the opportunity to cut interest rates at the latest policy meeting. With global stock markets plummeting, traders are discussing the possibility of an emergency rate cut by the Federal Reserve. Bloomberg columnist and analyst Marcus Ashworth stated that not only is this scenario highly unlikely, but it would also backfire.

Ashworth mentioned that the stock market decline is essentially a clearing of market positions rather than a reaction to economic shocks. Many investors have stumbled in leveraged trades: from borrowing low-priced yen at low interest rates to chasing the tech stock bubble, especially AI-related stocks. This has become their Icarus moment.

He stated that the U.S. economy is not facing any issues, so there is no reason for monetary authorities to intervene to alleviate losses for overextended stockholders. The so-called "Fed put" is a last-resort lever that is only used in emergency situations—and we are not there yet.

While the risk of a U.S. economic recession has increased, economic contraction is far from the base case scenario. The real-time GDP forecast from the Atlanta Fed predicts that the U.S. economy will grow by over 2% in the third quarter, following the impressive momentum seen in the second quarter.

Ashworth commented that the July non-farm payroll report released last Friday was weaker than economists' expectations, but the impact of Hurricane Beryl made it difficult to discern any worrying trends, rather than just a less robust month of job growth. The latest corporate earnings season has been overall quite good, despite a few exceptions.

However, a more sustainable trend may lie in the decline in government borrowing costs after fixed-income investors suffered disastrous blows from rising bond yields for several years. Over the past three months, the yield on the U.S. 10-year Treasury bond has dropped by 100 basis points to around 3.75%, with half of the decline occurring in the past eight trading days. Despite this, the 2-10 year Treasury yield curve remains inverted by 26 basis points, but this is not a sign of an economic recession. Bonds are gradually re-establishing their position in investment portfolios compared to the once omnipotent stocks, as the economic landscape becomes more complex and the restrictive borrowing costs to curb inflation appear less necessary.

Ashworth mentioned that emergency rate cuts do happen, but they are relatively rare and are only used when the economy faces sudden stagnation. The last time this occurred was in March 2020, when the Fed cut rates by 150 basis points to zero in response to the pandemic, maintaining this level for two years. Prior to this, the Fed also used rate cuts during the global financial crisis. After the bursting of the tech bubble in 2001, the Fed cut rates by 50 basis points twice within meetings, and after the September 11, 2001 terrorist attacks, the Fed also took rate-cutting actions. However, the Fed has learned painful lessons from this concept, aiming to protect investors from the impact of irrational exuberance The next meeting of the Federal Reserve will be held on September 18th, and the 50 basis point rate cut has been almost fully priced in by the futures market. Although Fed Chairman Powell downplayed the possibility of a significant rate cut at the press conference on July 31st, this view may no longer hold. The Fed realizes that maintaining relatively tight official interest rates may have been too long, but it also does not need to overreact, especially in an election year. Easing cycles typically start with a 50 basis point rate cut, and such a move may be reasonable this time, but it should be done at the right time and place and at a scheduled meeting, rather than as an emergency response to a belated market correction