- The Federal Reserve is called upon to cut rates urgently amid a global market selloff.
- However, emergency rate cuts could create even more panic.
Global markets experienced a severe drop on Monday, sending investors into a panic and fueling speculation that the Federal Reserve may need to step in rapidly.
“I’m calling for a 0.75% emergency cut in the Fed funds rate, with another 0.75% cut indicated for next month at the September meeting — and that’s minimum,” Jeremy Siegel, chief economist at WisdomTree, told CNBC.
“The Fed funds rate right now should be between 3.50% and 4%,” he added — not between 5.25% and 5.50%.
Siegel’s comments came as Japan’s Nikkei and Topix — the country’s two biggest stock market indices — closed down more than 12%, marking their worst day since the 1987 market crash.
US indices also took a hit, with the S&P 500 and Nasdaq dropping 4.2% and 6.3% respectively, though they have now recovered slightly.
And crypto took a beating, with Bitcoin and Ethereum briefly plunging 15% and 20% to prices unseen since February.
Although some investors — like BitMEX co-founder Arthur Hayes — have blamed the Bank of Japan’s monetary policy for the selloff, recent economic data is also showing that the US could soon enter a recession.
The problem, according to Siegel, is that the Federal Reserve kept federal funding rates too high for too long.
In its fight against inflation, the US central bank has constrained liquidity in the financial system to the point of hurting the economy, or so the reasoning goes.
And Siegel isn’t the only one who thinks the Federal Reserve needs to loosen liquidity conditions fast.
“Should the Fed determine that current policy is restrictive, it could undertake an emergency inter-meeting rate cut,” Brian Rudick, senior analyst at crypto trading firm GSR, told DL News.
The impact of a rate cut would be positive for crypto, as Bitcoin tends to perform well when liquidity is abundant. An emergency rate cut would also “demonstrate the Fed’s willingness to act,” Rudick said.
According to CME FedWatch data, traders are pricing in a 100% chance that the central bank will cut rates in September — and an 83.5% chance rates will be cut by 0.5%.
Don’t panic
But emergency rate cuts might do more harm than good, according to Sarah Hunt, founding partner and chief market strategist at asset management firm Alpine Saxon Woods,
“The concern is that the Fed doing an emergency cut — or stepping in too hard — is now going to worry people even further, and it’s not necessarily going to be helpful,” Hunt told Bloomberg.
Poor manufacturing data and alarming employment numbers are only two pieces of a greater puzzle, she said.
Japanese monetary policy, tensions between Israel and Lebanon, and the unwinding of levered trades are also shaking markets — and these factors have nothing to do with the Federal Reserve.
“Had the Fed cut last week you’d probably have had less of an amplitude of problems, but the direction would still have been down,” Hunt said.
And emergency cuts could trigger market panic regardless of whether they’re warranted or not, Jake Ostrovskis, OTC trader at crypto market maker Wintermute, told DL News.
Such cuts would “signal panic or undue concern about the economy, potentially undermining confidence in the central bank,” Ostrovskis said.
That, in turn, would “create uncertainty and increase market volatility in all assets — especially long-duration assets like crypto,” he said.
Noelle Acheson, former head of market insights for Genesis Global Trading, has a similar insight.
“An emergency cut would signal panic, not a good look for the US central bank,” she wrote on X. “Imagine the panic if the Fed does an emergency cut and does not stop the rout.”
Tom Carreras is a markets correspondent at DL News. Got a tip about crypto markets and the Federal Reserve? Reach out at tcarreras@dlnews.com
