Source: Wall Street See

As global economic uncertainties increase, financial markets are betting that the Fed may take emergency rate cuts between meetings and is expected to cut rates by 25 basis points within a week. According to statistics, from 1987 to now, the Fed has implemented emergency rate cuts nine times. There is more than a 50% chance of a 25 basis point interest rate cut within a week.Please use your Futubull account to access the feature.

On August 6th, Bank of America analyst Michael Gapen released a report reviewing the history of the Fed's rate cut measures and said that history shows that the conditions for emergency rate cuts between meetings are extremely harsh and occur only in truly emergency situations such as system-wide economic crises, large-scale asset bubble bursts, and major geopolitical conflicts. In contrast, the current economic and market conditions have not yet reached the threshold of emergency rate cuts in history.

Emergency rate cuts occur only in truly emergency situations.

Analysts believe that Fed emergency rate cuts occur only when the economy or financial markets are truly in an emergency situation, such as a global pandemic (COVID-19), bursting of asset price bubbles (tech bubble and 1987 stock market crash), systemic events with enormous spillover effects (global financial crisis, LTCM event, and Russian financial crisis), and geopolitical conflicts (9/11 terrorist attacks).

In March 2020, the COVID-19 pandemic swept across the global financial markets and economies. In the early stages of the pandemic, the S&P 500 plunged by about 33%. On March 3, the Fed implemented emergency rate cuts, lowering the federal funds rate target range by 50 basis points to 1.0-1.25%. The central bank said:

"We are closely monitoring developments and their implications for the economic outlook and will use our tools and act as appropriate to support the economy."

Less than two weeks after this rate cut, on March 15, the Fed again lowered the federal funds rate target range by 100 basis points to 0.0-0.25%. The FOMC statement said:

"The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."

In January 2008, amid the global financial crisis, the Federal Open Market Committee decided to lower the federal funds rate target by 75 basis points to 3.5% and stated:

"The action is taken in view of a weakening of the economic outlook and increasing downside risks to growth. Although pressures in short-term funding markets have abated somewhat, broader financial market conditions continue to deteriorate and credit has tightened further for some businesses and households. In addition, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

The conditions for emergency rate cuts between meetings are extremely harsh.

The above conditions for emergency rate cuts include major downside risks to growth, turbulence and uncertainty in financial markets, interruption of economic activity in many countries, weakening economic prospects and increasing growth risks, further contraction of the real estate market, persistent weakness in capital spending, continuous erosion of current and expected profitability, and increasing uncertainty about business prospects.

In addition, historical emergency rate cuts have been accompanied by the failure of large, systemically important financial institutions, such as LTCM, Fannie Mae, Freddie Mac, and Lehman Brothers. Significant declines in the stock market have also been one of the triggering factors, such as the bursting of the tech bubble (about 40%), the 1987 stock market crash (about 30%), and the global financial crisis (about 55%).

From October 1999 to March 2000, the Nasdaq index doubled, but by mid-2000, the index had fallen by nearly 40% and by the end of 2002 had fallen by 75%. After the bursting of the tech bubble in 2001, the Fed implemented two emergency rate cuts of 50 basis points each.

From January to August 1987, the Dow Jones Industrial Average rose by 44%. Subsequently, the index fell by 4.8% on October 16th and then by 22.6% on Monday, October 19th, later known as "Black Monday." The crash was considered one of the first interrelated global events and was influenced by many factors and structural deficiencies in financial markets. The Fed conducted open market operations the next day to provide liquidity and lowered the federal funds rate by about 50 basis points to 7.0%.

History shows that the conditions for the Fed to adopt emergency rate cuts between meetings are extremely harsh.

Analysts say that while it cannot be ruled out that there may be future situations where emergency rate cuts are necessary, based on current conditions and historical experience, it is still too early for the Fed to take action on an emergency rate cut between meetings:

"We are still far from that point."

Editor / jayden