Will the Fed stick to its guns or enact an emergency rate cut?

A swift and steep decline in the stock market has fueled speculation about an imminent emergency rate cut from the Fed. Economists, however, say it’s unlikely.

Since the Fed's July 31 decision to hold rates steady at a 23-year high, the stock market has taken a major hit.

Last week, the S&P 500 tumbled 6%, while the Nasdaq and Dow Jones also saw significant drops. Adding to market jitters, July's unemployment rate unexpectedly rose to 4.3%, surpassing all economist estimates.

All this has fueled speculation about whether the Fed will—or should—intervene before its September meeting.

"Some analysts are even suggesting an intra-meeting emergency cut is warranted," said Seema Shah, chief global strategist at Principal Asset Management, in an email.

Markets are betting on a rate cut, with Bloomberg News reporting a 60% likelihood of an emergency 0.25 percentage point cut within a week.

Meanwhile, futures markets have nearly fully priced in a 50 basis-point reduction for the September meeting despite Fed Chair Jerome Powell downplaying the prospect of an outsized cut in July.

Chicago Federal Reserve President Austan Goolsbee told CNBC that if economic conditions deteriorate further, "we're going to fix it." However, despite weaker job numbers, he doesn't believe the economy is in a recession.

Is an emergency cut really necessary?

While the market shakeup has raised some concerns, there are still signs of economic resilience. For instance, the Atlanta Fed projects 2% GDP growth for the third quarter, suggesting the economy still has some momentum.

Given these mixed signals, many experts are urging the Fed to hold steady.

"An emergency rate cut could do more damage than it helps," warned Amanda Agati, chief investment officer of PNC's asset management group.

"It might undermine confidence in the economy because then everyone will ask, 'What does the Fed know that we don't?'"

Bloomberg columnist Marcus Ashworth argues that Fed intervention now would be “an overreaction that could well backfire in the longer run.” He suggests the Fed should stand firm against market pressure and allow the current volatility to run its course.

Ashworth recommends Powell use the upcoming Jackson Hole conference to clarify the Fed's stance, emphasizing long-term economic stability over knee-jerk reactions to market swings.

“Too many have been conditioned to believe that it is the Fed’s role to protect them from the unsettling volatility that comes from excessive risk-taking.”

The history behind emergency rate cuts

The Fed doesn’t engage in emergency rate cuts very often. In fact, they've only done it nine times in the last 30 years.

The most recent was in March 2020, at the onset of the pandemic, when the Fed slashed rates by 150 basis points in two emergency moves. Prior to that, the last emergency cuts came during the 2008 financial crisis.

Despite the recent stock market shakeup, major indexes are still up for the year, setting this situation apart from the previous downturns that called for emergency cuts.

The Fed's next scheduled meeting on September 17-18th gives policymakers time to assess whether drastic rate cuts are truly necessary.