Federal Reserve Chairman Jerome Powell announces that interest rates will remain unchanged during a news conference at the Federal Reserve’s William McChesney Martin Building in Washington, D.C., on June 12, 2024.
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According to one economist, a further rate cut by the Federal Reserve this month could rattle financial markets and send the wrong message that a recession is coming.
With U.S. central bank policymakers widely expected to cut rates at their September 17-18 meeting, investors are watching economic data closely for clues as to how far the rate hikes will go.
George Lagarias, chief economist at Forbes Magyars, told CNBC on Thursday that while he can’t guarantee how much the Fed will cut rates at its next meeting, he’s “firmly” in favor of a quarter-percentage-point cut.
“I don’t see the urgency of a 50 percent (basis point) cut,” Lagarias said.
“A 50 (point) cut could send the wrong message to the markets and the economy. It could send a message of urgency, and, you know, it could become a self-fulfilling prophecy,” he continued. The point is 0.01 percentage point.
“So, if they go there without any special reason, it would be very dangerous. Unless there is an event, unless there is something that disrupts the market, there is no reason to panic.”
How big will the Fed cut rates?
The Federal Reserve’s benchmark lending rate, which influences most other interest rates paid by consumers, is currently targeted at a range of 5.25% to 5.5%.
Atlanta Federal Reserve President Raphael Bostic signaled Wednesday that the central bank is ready to start cutting rates. His comments came ahead of the highly influential nonfarm payrolls report on Friday.
Strategists have generally said the most likely outcome of the Fed’s upcoming meeting is a 25 basis point rate cut, but recent economic data appear to reinforce the possibility of a deeper cut.
U.S. job openings fell to their lowest level in three and a half years in July, data released Wednesday showed, another sign of a weak labor market.
Market participants are firmly expecting a rate cut at the Federal Reserve’s next policy meeting, but the odds of a 0.5 percentage point cut have increased after the release of the Job Openings and Labor Turnover Survey (JOLTS) report.
According to CME Group’s FedWatch tool, traders currently see about a 59% chance of a 25 basis point rate cut in September, and a 41% chance of a 50 basis point cut.
‘Far from recession’
Ahead of Friday’s monthly jobs report, investors are likely to evaluate new economic data on Thursday, including the August ADP employment numbers, the latest weekly initial jobless claims and August Institute for Supply Management data.
“There’s no question that a recession is coming, but I think we’re far from a recession. We know that there’s been some downturn in the jobs market. Some of it … has to do with increased supply rather than decreased demand,” Lagarias said Thursday on CNBC’s “Squawk Box Europe.”
“Yes, job creation is weak, manufacturing is weak, but we expected this recession, everyone expected this recession. There is no evidence of a recession at all, and I don’t think the Fed will be very aggressive until that point.”
Lagarias isn’t the only one who has warned of a half-percentage-point cut by the Fed this month.
Mohit Kumar, chief European financial economist at Jefferies, told CNBC on August 13 that there is “no need whatsoever” for the Fed to cut rates by 50 basis points at its September meeting.
— CNBC’s Jeff Cox contributed to this report.
