Circle Squared Alternative Investments‘ Jeff Sica is sounding the alarm on the credit market, pointing to a potential problem as he weighs in on the recent market selloff. With fears of an impending recession looming, some Wall Street economists are betting that the Federal Reserve will approve a significant interest-rate cut when policymakers next meet in September.
According to the CME Group, a majority of traders are already pricing in an 84.5% chance of a 50 basis point reduction during the Fed’s meeting on Sept. 17-18. This sentiment is driven by concerns over the recent market turmoil and the disappointing July jobs report, which showed lackluster growth in nonfarm payrolls and an unexpected jump in the jobless rate to 4.3%.
Joe Brusuelas, RSM chief economist, believes that while conditions may not warrant an emergency rate cut, the case for a supersized 50 basis point reduction at the next meeting has been bolstered by recent market volatility. The Sahm rule, an indicator used to provide an early recession signal, has been triggered by the recent job report, further fueling fears of a slowing economy.
The rule stipulates that a recession is likely when the three-month moving average of the jobless rate is at least a half-percentage point higher than the 12-month low. With the unemployment rate averaging 4.13% over the past three months, significantly higher than the 3.5% rate recorded in July 2023, the Sahm rule has successfully predicted every recession since 1970.
Stocks plunged following the report, with major indexes experiencing significant losses. The S&P 500 recorded its worst day since October 2022, while the Dow Jones Industrial Average and the Nasdaq Composite also saw steep declines. The sell-off continued into the following week, with the S&P 500 sliding another 3%.
UBS analysts have revised their base case to include rate cuts of 50 basis points in September and 25 basis points each in November and December. The slowdown in job growth has raised questions about whether the Fed waited too long to cut interest rates, which are currently near a 23-year high. While policymakers voted to hold rates steady during their last meeting, they have indicated openness to a rate cut in September.
Speculation has also arisen about the possibility of an emergency rate cut by the Fed. However, Chicago Fed President Austan Goolsbee has cast doubt on the necessity of such a move, emphasizing the importance of monitoring the real side of the economy rather than reacting solely to stock market fluctuations.
As the market continues to grapple with uncertainty and recession fears mount, all eyes will be on the Federal Reserve’s upcoming meeting in September to see how policymakers respond to the current economic challenges.