Fed Unlikely to Cut Rates Despite Market Turmoil Following Weak Jobs Report

Fed Unlikely to Cut Rates Despite Market Turmoil Following Weak Jobs Report

Stocks plunged for the second consecutive day on Monday, fueling speculation about whether the U.S. economy has slipped into a recession after last Friday’s surprisingly weak jobs report. Investors are increasingly hopeful that this could prompt the Federal Reserve to intervene with an emergency rate cut.

However, that scenario seems highly unlikely.

“The Fed’s mandate isn’t about ensuring the stock market’s comfort,” said Chicago Fed President Austan Goolsbee in a Monday interview with The New York Times.

In retrospect, one could argue that the central bank might have been better off cutting its benchmark lending rate at its meeting last week, which wrapped up before the latest jobs data was released. Had officials been aware that the unemployment rate would spike from 4.1% in June to 4.3% in July—nearly a full percentage point higher than at the start of the year—they might have been more inclined to believe that the U.S. economy is weakening to a degree that warrants a rate cut despite its risks.

But calling an unscheduled meeting now to lower rates ahead of the Fed’s next scheduled meeting—more than six weeks away—could backfire, potentially stoking further panic.

Emergency rate cuts are uncommon

The Fed’s rate-setting committee typically meets eight times a year to determine the appropriate interest rate levels that promote maximum employment and stable prices.

However, if an unexpected event arises between those meetings that alters their perspective on the optimal rate, officials can convene for an unscheduled “emergency” meeting. The last time this occurred was at the onset of the pandemic, when they decided on a half-point rate cut on March 3. Less than two weeks later, they met again to slash rates by a full point to near-zero levels.

At that time, the situation was deteriorating rapidly, and by implementing two significant emergency cuts in quick succession, Federal Reserve officials avoided the dilemma of whether their actions might unnecessarily induce public panic.

Before these cuts, the Fed last resorted to an emergency rate reduction during the Great Recession, shortly after the collapse of Lehman Brothers in the fall of 2008.

Perception is crucial

The Federal Reserve is keen to avoid creating the impression that the U.S. economy is teetering on the brink of a recession. Such perceptions can quickly become reality, regardless of their accuracy.

“As a general rule, I’m not a fan of inter-meeting cuts. They tend to signal panic rather than stability,” said Charles Plosser, then-president of the Philadelphia Fed, during the central bank’s emergency meeting on October 7, 2008. Nonetheless, he reluctantly supported an emergency cut since other central banks were taking similar actions.

That’s not the case at present.

Recent rate cuts by central banks—including the Bank of Canada, the European Central Bank, and the Bank of England—have all occurred during pre-scheduled meetings.

Should the Federal Reserve proceed with an emergency cut, it would inevitably raise questions: What does the central bank of the world’s largest economy know that others don’t?

This concern was echoed by then San Francisco Fed President Janet Yellen during an unscheduled meeting on January 9, 2008.

“I’m worried that it could be seen as a sign of panic by the Committee and might wrongly suggest we have insider information indicating that things are even worse than markets believe,” Yellen, now the Treasury Secretary, said according to a Fed transcript of the meeting.

She was also concerned that an emergency cut could be perceived as an overreaction to the employment report released just five days before the Federal Reserve met. That report revealed a 0.3% rise in unemployment to 5% in December 2007. Ultimately, officials opted to wait until a later unscheduled meeting to lower rates.

Would an immediate cut have any impact?

At the October 2008 meeting, Plosser cautioned that cutting rates immediately wouldn’t “make the next few months any less painful for the overall economy.”

The same holds true today.

In the short term, the size and timing of a rate cut by the F Reserve may not significantly influence the economy, as it typically takes around a year for interest rate adjustments to ripple through the system.

Meanwhile, U.S. Treasury yields have already begun to decline in anticipation of potential rate cuts. As these yields serve as a benchmark for various loan interest rates, the drop could provide some relief to borrowers currently facing financial pressure.