The Federal Reserve has sought to cut rates urgently amid a global market selloff. However, emergency rate cuts could create more panic.
Global markets suffered a sharp fall on Monday, spooking investors and fueling speculation that the Federal Reserve might need to step in faster.
“I'm calling for an emergency 0.75% cut in the Fed funds rate, with another 0.75% cut at next month's September meeting suggested — and that's minimal,” said Jeremy Siegel, chief economist at WisdomTree. Said CNBC.
“The fed funds rate should be between 3.50% and 4% right now,” he added — not between 5.25% and 5.50%.
Siegel's comments came as Japan's Nikkei and TOPICS — the country's two biggest stock market indexes — closed down more than 12%, marking their worst day since the 1987 market crash.
US indices were also hit, with the S&P 500 and Nasdaq falling 4.2% and 6.3% respectively, although they have now recovered slightly.
And crypto took a hit, with bitcoin and ethereum briefly falling 15% and 20% to prices not seen since February.
While some investors — such as BitMEX co-founder Arthur Hayes — blamed the Bank of Japan's monetary policy for the sell-off, recent economic data also showing The US may soon enter a recession.
The problem, according to Siegel, is that the Federal Reserve has kept federal funding rates too high for too long.
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In the fight against inflation, the US central bank has restricted liquidity in the economy to the point of hurting the economy, or so the logic goes.
And Siegel isn't the only person who thinks the Federal Reserve should unwind liquidity conditions faster.
“If the Fed finds that the current policy is limited, it may undertake an emergency inter-meeting rate cut,” said Brian Rudick, senior analyst at crypto trading firm GSR. News.
The impact of the rate cut will be positive for crypto like Bitcoin Performs well When liquidity is abundant. An emergency rate cut also “demonstrates the Fed's willingness to act,” Ruddick said.
According to CME FedWatch dataTraders are pricing in a 100% chance the central bank will cut rates in September – and an 83.5% chance rates will drop 0.5%.
Don't worry
But emergency rate cuts do more harm than good, according to Sarah Hunt, founding partner and chief market strategist at asset management firm Alpine Saxon Woods.
“The worry is that the Fed making emergency cuts — or stepping in too hard — will make people more anxious now, and that's not necessarily helpful,” Hunt said. Said Bloomberg.
Poor manufacturing data and dire employment numbers are just two pieces of a larger puzzle, she said.
Japanese monetary policy, tensions between Israel and Lebanon and the unwinding of leveraged trades are also shaking markets — and these factors have nothing to do with the Federal Reserve.
“If the Fed had cut last week, you probably would have had a lower spread of problems, but the direction would still have been lower,” Hunt said.
And emergency cuts can trigger market panic regardless of whether they're warranted, says Jake Ostrovskis, OTC trader at crypto market maker Wintermute. News.
Such cuts “suggest panic or excessive anxiety about the economy, which undermines confidence in the central bank,” Ostrovskis said.
That, he said, “creates uncertainty and increases market volatility in all assets — especially long-dated assets like crypto.”
Noel Acheson, former head of market insights for Genesis Global Trading, has a similar insight.
“Emergency cuts signal panic, not a good look for the US central bank,” she said wrote In X. “Imagine the panic if the Fed makes emergency cuts and doesn't stop the rout.”
Tom Carreras is a market correspondent at News. Got a tip about crypto markets and the Federal Reserve? Reach [email protected]
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