Can the U.S. economy survive interest rates hovering at their highest levels in two decades? That’s a question that’s been echoing through financial markets after July’s weak jobs report and the subsequent global sell-off in stocks.
The Federal Reserve kept interest rates steady between 5.25% and 5.5% after its meeting last week. The July jobs report was released shortly after the meeting and showed slower-than-expected growth and a rise in unemployment to 4.3%. That’s the highest unemployment rate since October 2021, but still historically low. A global frenzy in stock markets followed. As of Monday, Japan’s Nikkei index was down more than 12%, while U.S. stocks were down more than 2.5%.
Many financial experts and investors expect the Fed to cut interest rates at its September meeting. However, with seven weeks until that meeting, some economists predict the Fed could announce an emergency rate cut before then due to growing recession fears. Bankrate’s Second Quarter Economic Indicators Survey found there is a 32 percent chance the economy will be in recession by this time next year.
Emergency rate cuts are rare and usually occur in times of extreme emergency. Over the past two decades, the Fed has approved emergency rate cuts only seven times: three times in 2001 after the 9/11 terrorist attacks and during the bursting of the tech stock bubble; two during the Great Recession; and two during the COVID-19 pandemic.
Here’s what experts say about the possibility of an eighth emergency rate cut.
Will the Fed make an emergency rate cut? Economists and financial experts have mixed reactions
With recession concerns rising, many economists and financial experts are divided over whether the Fed will impose an emergency rate cut before its September meeting.
For most of the past two years, the Fed has been raising interest rates to control the pace of inflation that has been plaguing consumers since the start of the COVID-19 pandemic. Those rate hikes have slowed inflation from 9.1% in June 2022 to 3% in June 2024. The central bank is now grappling with the question of when to change course. If it keeps rates high for too long, it could push the economy into recession.
Greg McBride, CFA and chief financial analyst at Bankrate, said the weaker-than-expected jobs report and the stock market sell-off aren’t enough to justify the Fed cutting interest rates between meetings.
“This would require more than 114,000 new jobs and a normal, overdue market correction,” McBride says.
The U.S. economy is “not even close to the kind of crisis that would cause the Fed to cut interest rates between meetings,” said Mark Hamrick, Bankrate’s senior economic analyst.
For the Fed to make such a move, markets would have to recover to the point where businesses and consumers would have extremely limited access to cash and borrowed money, as was seen early in the COVID-19 pandemic and during the 2007-2008 financial crisis, Hamrick said.
“One could argue that the current benchmark rate level is overly restrictive and should be lowered,” Hamrick said. “That’s why expectations are high that a September rate cut is likely.”
But two prominent economists say the stock market turmoil could be reason enough to prompt an immediate Fed rate cut. Paul Krugman, a Nobel laureate in economics and a New York Times Opinion columnist, said he doesn’t expect the Fed to cut rates between sessions at X because it would cause more panic, but with panic already high among investors, there could be “real reason for an immediate cut.”
“So while I would argue for rate cuts — certainly 50 in September — I wouldn’t call for an inter-meeting cut because that could signal panic,” Krugman wrote in X. “But since we may already be seeing panic, that argument loses steam.”
Economist Jeremy Siegel of the Wharton School of the University of Pennsylvania voiced concerns about the Fed’s recent decision to hold interest rates steady, calling for an immediate 75 basis point cut in the Fed funds rate in an interview on CNBC’s “Squawk Box.” Siegel also predicts another 75 basis point cut at the Fed’s September meeting.
“We are 90 percent closer to the inflation rate target,” he said in the interview. “We have exceeded the unemployment rate target [4.2 percent]”Those are two clearly stated goals by the Federal Reserve. How much have we moved the fed funds rate? Zero.”
If the Fed were to impose an emergency rate cut, it could alarm consumers that the economy is in worse shape than expected, Sarah Hunt, chief market strategist at Alpine Saxon Woods, told Bloomberg TV.
“The concern that the Fed is going to make an emergency cut or intervene too harshly is now going to make people even more anxious, and that’s not necessarily going to be helpful,” Hunt said in the interview. “These markets need to stabilize.”
In an interview on CNBC’s “Squawk Box,” Chicago Federal Reserve President Austan Goolsbee wouldn’t say whether the central bank would cut interest rates immediately, but he acknowledged that the Fed was taking a “restrictive stance” on monetary policy. He stressed that the Fed would step in if the economy started to deteriorate.
“You only want to be that restrictive if there’s a fear of overheating. To me, the data doesn’t look like overheating,” Goolsbee said in the interview. “It’s the markets’ job to react and the Fed’s job to act.”
3 reasons why the Fed won’t cut interest rates immediately
A few economists and financial experts predict an immediate Fed rate cut, but most do not. Here are three reasons why the Fed will not intervene before its next meeting in September.
- This will make Americans even more worried. An immediate rate cut could create more fear among Americans and reinforce concerns that the U.S. is heading for a recession. The Fed strives to maximize employment, stabilize prices and maintain financial stability, so an intersession rate cut could have the opposite effect of what the Fed wants.
- Some volatility in the stock market is not enough for the Fed to make an emergency rate cut. Markets are more responsive and volatile than monetary policy. Given the limited economic data, many experts believe the stock market volatility is an overreaction. However, some experts argue that the panic is enough for the Fed to take action and implement an emergency rate cut.
- There are not enough signs of trouble in the economy. There has been some weak economic data recently, but it’s not enough to raise alarms. The economy added fewer jobs than expected in July, and unemployment rose to 4.3%, but that’s still a historically low figure for unemployment. Inflation fell to 3% in June, the lowest since early 2021, according to the latest CPI report. Real gross domestic product (GDP), a key indicator of economic growth, rose by 2.8% in the second quarter of 2024, according to the Bureau of Economic Analysis.