Source: Wall Street See
Analysis indicates that even if the Federal Reserve cuts interest rates, it cannot guarantee rapid economic recovery. And if the market expectations are too high, once the actual interest rate cut by the Federal Reserve does not meet the expectations in terms of magnitude or timing, it may cause violent fluctuations in the market.
In recent times, the market has been volatile, and investors are worried about an economic recession. Rate cuts are generally considered a good medicine for stimulating the economy and boosting the stock market.
However, another concern has arisen: some traders believe that overly high expectations for rate cuts may be another trap.
This is because even if the Fed cuts rates, it does not necessarily guarantee a rapid economic recovery. Moreover, if market expectations are too high and the Fed's actual rate cut size or timing does not match expectations, it may lead to severe market fluctuations.
"I don't think the Fed wants to be seen as reckless," says Diane Jaffee, a senior investment portfolio manager at TCW. "That's not what they want to do."
Rate cuts enthusiasm remains; analysts say rate cuts are not a panacea.
The market has been volatile in the past two weeks.
First, there was an escalation in the Middle East's geopolitical conflict, then the release of July unemployment rate data triggered Sam Law, followed by a slump in tech stocks dragging down US stocks, the Bank of Japan's interest rate hike triggered a 20 trillion yen arbitrage trade liquidation, and global stock markets collapsed. market fatigue.
This week, there was a call to cut rates before the Fed's September interest rate decision. Radical views have suggested that the possibility of rate cuts this week is 60%.
However, last night's release of the first week of US applications data showed a trend of warming in the job market, relieving concerns about a US economic recession.
Jaffee believes that September seems to be the best time for the Fed to start cutting rates. Although she does not rule out the possibility of a larger rate cut of 50 basis points, 25 basis points is still the baseline. "They want to do it right," she notes.
According to data, even with recent declines, it still rose by more than 12% this year.$S&P 500 Index (.SPX.US)$ Still, it has risen strongly by over 12% this year.
Currently, the market has fully priced in a 25 basis point rate cut by the Fed in September. Some traders also believe that the possibility of a 50 basis point cut in September by the Fed is close to 60%, up from less than 5% a month ago. In this case, the Federal Funds Rate will fall to 4.75%-5%.
Jitesh Kumar of the French Industrial Bank believes that Wall Street may be too hasty in expecting a significant rate cut.
In a report on Thursday, he pointed out that the changes in short-term interest rates show that investors generally believe that the Fed will cut interest rates by more than 1% in the next six months. In the past, when the expected rate cut was over 1%, it often meant that the market believed that the economy was about to enter a recession. In other words, the market has already digested the possibility of an economic recession and rate cuts in advance.
If actual economic data does not show clear signs of recession, and the Fed's rate cut size or timing does not match market expectations, it will lead to market fluctuations.
Schutte of Northwestern Mutual also believes that excessive reliance on rate cuts may cause the market to overlook other risk factors:
Rate cuts are not a panacea for all economic problems.
Editor / jayden