Give up, Powell won't intervene to save the market

Claire Jones from the global economic team of foreign media stated that panic will not prompt the Federal Reserve to cut interest rates urgently, and the 50 basis point rate cut in September is not set in stone. Here are her views.

Nervous investors have been selling stocks over the past week, leading to significant declines in major global stock markets.

While this recent drop does not have a single cause, one factor is the July US employment report released last Friday, which has raised concerns about the world's largest economy, the United States, heading towards a recession.

Investors have also criticized the Federal Reserve for moving too slowly in cutting rates from the current high of 5.25% to 5.5% over the past 23 years.

As Federal Reserve Chairman Powell finally prepares for the first rate cut since 2020, he faces pressure to cut rates in the most dramatic way possible.

The sharp decline in US stocks has sparked speculation about the Federal Reserve taking emergency action before the scheduled vote in mid-September.

Unless a major financial disaster occurs, this scenario is unlikely to happen. Federal Reserve officials are far less pessimistic or impatient about the outlook for the US economy than investors.

The market should be grateful for this.

It is reasonable to discuss a 50 basis point rate cut at the next vote. This topic was indirectly mentioned at the Federal Open Market Committee (FOMC) press conference last Wednesday before the panic began.

Although Powell stated that a rate cut of more than 25 basis points "is not something we are currently considering," he later added that if officials "see what looks like a more severe economic downturn, we would intend to respond."

The market clearly believes that the Federal Reserve shares their view that job data indicates the growth in the US is about to disappear. However, we are not certain if this is the view of Federal Reserve officials.

Chicago Fed President Evans and San Francisco Fed President Daly, who spoke publicly this week, have called on investors to remain calm. In the past, other rate setters have stated that a gradual cooling of the labor market is necessary to achieve the 2% inflation target successfully.

From now until mid-September, we will hear Powell's remarks at the end of this month's Jackson Hole meeting, and another employment report will be released.

The employment data may deteriorate further. If this is indeed the case, and inflation readings meet or exceed expectations, then a 50 basis point rate cut seems possible.

But if the data in August is mixed, we cannot confirm whether investors' anxiety will influence the Federal Reserve.

A 50 basis point rate cut also faces other obstacles.

The September vote is the last planned vote before the presidential election. Republican candidate Trump has subtly threatened that if the Federal Reserve Chairman chooses to cut rates before the election, he will dismiss Powell. He has recently criticized Powell and stated, "I hope the president has some say over rates."

We believe these threats will not intimidate Powell. They will not prevent the Federal Reserve from cutting rates. However, the election schedule may mean that the FOMC will need strong evidence of a significant economic downturn before taking large-scale action in September This is not the beginning of any interest rate cut cycle. Due to the inflation rate rising to the highest level in decades, the reputations of central banks around the world have been severely damaged, marking the start of a new crisis, giving them more reason to proceed with caution.

They are also eager to avoid a notion that the so-called "Greenspan put" still exists, where responding to a sharp stock market decline with aggressive rate cuts is something Federal Reserve officials are willing to do.

Sometimes, shock and awe are necessary. After a surge in inflation in the early stages of the COVID-19 pandemic, the Federal Reserve aggressively hiked rates.

However, with overwhelming evidence that they waited too long to combat price pressures each time they voted to raise rates by 75 basis points, at least in the eyes of Federal Reserve officials, it is not yet so clear whether the U.S. is in a severe recession.

Investors who do not share this view may be disappointed