The Fed’s Rate Cuts During Past Stock Swoons: A Different Scenario This Time – Reuters

By Ann Saphir and Dan Burns

A significant slowdown in the U.S. job market has sparked days of turmoil in global stock markets, leading to speculation that the Federal Reserve may not postpone interest rate cuts until its scheduled meeting in September.

Earlier this week, an interest rate futures contract, set to expire later this month and reflective of Fed policy expectations, surged to a two-month high, indicating a belief that rates could be lowered by the end of August.

However, the likelihood of an immediate cut seems low. Chicago Fed President Austan Goolsbee noted, "the law doesn’t say anything about the stock market. It’s about employment and it’s about price stability," pointing to the Fed’s dual mandate focused on full employment and price stability.

Many analysts are expecting a half-percentage-point rate cut at the September meeting, but few anticipate any moves sooner than that. Nationwide economist Kathy Bostjancic stated that current economic data does not justify an emergency rate cut and warned that such a move could provoke further panic in the markets.

Former New York Fed President Bill Dudley, who advocated for immediate rate cuts even before the recent data showed July’s unemployment rate had risen to 4.3%, declared that an emergency cut is "very unlikely."

Following the recent market downturn, global stock indices—also affected by concerns over Bank of Japan tightening and the unwinding of yen-funded trades—have begun to recover. A report indicating a decline in unemployment insurance claims added to the relief felt in U.S. markets.

Traders of short-term U.S. interest-rate futures have largely abandoned bets on an intra-meeting Fed response and have reduced expectations on the magnitude of the first rate cut. What was once perceived as a nine-to-one chance of a half-point rate decrease in September is currently considered nearly equal to the odds of a quarter-point cut.

In late August, Fed Chair Jerome Powell is expected to provide insights on potential monetary policy during the annual economic symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming.

Currently, Powell is anticipated to disregard the recent stock market fluctuations and maintain the position he articulated last Wednesday, which followed the Fed’s decision to keep the policy rate within the 5.25%-5.50% range. "If we do get the data that we hope we get, then a reduction in our policy rate could be on the table at the September meeting," he stated.

Upcoming data on employment, inflation, consumer spending, and economic growth may influence whether the rate change will be a quarter-point cut or a more substantial one.

Historically, on each of the eight occasions in the past 30 years when the Federal Reserve cut rates between scheduled meetings, the market disruptions extended beyond equities. Notably, bond market signals of growing credit flow problems were evident, a concern that has yet to materialize this time.

Examining those past instances illustrates why they were distinct.

1. Russian Financial Crisis/LTCM – 25 basis points (October 15, 1998): The Fed had recently lowered rates before cutting again in response to financial strain from the collapse of Long-Term Capital Management and Russia’s sovereign debt default.

2. Technology Stock Swoon – 100 basis points (January 3 and April 18, 2001): The Fed made two surprise half-point cuts as the dot-com bubble burst, which had started to impact not just the stock market but also the corporate bond market.

3. September 11 Attacks – 50 basis points (September 17, 2001): Following the attacks and the closure of U.S. financial markets, the Fed cut rates and promised to ensure ample liquidity in the markets, as high-yield bond spreads widened significantly.

4. Global Financial Crisis – 125 basis points (January 22 and October 8, 2008): The Fed cut rates dramatically as a crisis that began in subprime lending escalated into a global financial meltdown, leading to coordinated actions among global central banks.

5. COVID-19 Pandemic – 150 basis points (March 3 and March 15, 2020): The Fed made aggressive cuts in response to the economic fallout from the pandemic, as markets were hit hard and credit spreads widened significantly.

As policymakers look ahead, they remain mindful of the broader economic indicators that will inform their next steps.