As turmoil swept through global financial markets on Monday, fueled by concerns that the economy is headed for a hard landing, investors began to speculate that the Federal Reserve could jump in to cushion the fallout with an emergency interest rate cut.
But close Fed watchers doubted that the central bank would take such dramatic action, and one Fed official underscored that the central bank sets rates with an eye on the job market and inflation — not what stock market investors want.
“We’ve got to be monitoring the real side of the economy: There’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview on Monday afternoon.
The Fed only considers emergency cuts — ones that occur outside of its regularly scheduled meetings — in extreme situations. The most recent one happened on March 15, 2020, when central bankers slashed borrowing costs to near-zero as the onset of the coronavirus pandemic sent panic coursing across global markets.
Monday’s sell-off was less drastic than that moment. Investors are dumping stocks because they have become nervous that the economy might fall into a recession after a few weak economic data releases in the United States, including a jobs report released last Friday that showed unemployment rising. Joblessness rarely rises sharply outside of an economic downturn.
The data fueled serious concerns that Fed officials have fallen behind on adjusting their policy stance. Central bankers have held interest rates at 5.3 percent for a full year, a relatively high setting that is making it expensive to borrow to buy a home or expand a business. The risk is that Fed policymakers might have choked off demand too much for too long, causing a slowdown in the labor market that will begin to snowball into wider economic pain.
As stock indexes slumped around the world, investors began to bet heavily that the Fed would cut interest rates sharply in the coming months. While a rate cut at the Fed’s September meeting was widely expected even before the employment report last week, traders now see a large reduction of half a percentage point or more — bigger than the quarter-point moves that the Fed tends to announce during normal times.
Some outside commentators called for rapid and drastic reductions, starting imminently. But Joseph A. LaVorgna, chief economist at SMBC Nikko Securities, argued in a note that an inter-meeting cut “would look like a panic move.”
And some longtime Fed watchers pointed out that the central bank only tends to make moves between meetings when there is a risk that markets are going to stop functioning properly, not just because stock prices are falling.
“I think what you generally find is that they tend to happen in periods of credit market disruption and financial system freezing up — right now, markets are having not a good day, but I think it’s orderly,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
Mr. Goolsbee had said on CNBC Monday morning that if labor market and economic conditions started weakening across the board, “we’re going to fix it.”
But he clarified in an interview that he was referring specifically to the Fed’s twin goals of maximizing employment and stabilizing inflation, and not to the stock market. He said the idea of an inter-meeting rate cut was “outside of” his “wheelhouse,” but also emphasized that the stock market was overreacting to a move in the economic data that was “one data point.”
Ms. Goolsbee also noted that jobs numbers come with a margin of error — the numbers can jump around for quirky reasons, and they get revised — and suggested that it was too early to draw firm conclusions from July’s report.
But he and other economists have been watching an array of data showing signs that the economy may be slowing. Jobless claims have moved higher. Manufacturing activity is showing evidence of a cool-down.
And with the risks of a pullback growing, Mr. Feroli at J.P. Morgan suggested that the Fed will want to stop tapping the brakes on the economy, which could mean that they will want to drop interest rates from their high current level relatively quickly. He expects a half point reduction in September.
Given the latest signs of softening in the economy, it seems like it may look in hindsight like the Fed waited too long to begin reducing rates.
Although officials discussed cutting borrowing costs at their meeting last week, they held off, choosing to wait for some final confirming evidence that inflation is fully under control, hopeful that the economy was strong enough for them to take their time.
In the two days immediately after they made that decision, reports showed a pop in jobless claims and a jump in the unemployment rate.
“There are no mulligans in monetary policy, unfortunately, but we’ll probably look back and say — yes, they waited too long,” Mr. Feroli said. “In real time, it didn’t seem obvious.”
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