Market Overly Concerned, Should the Fed's Sharp Rate Cut Be Seen as a Positive Signal?

Michael Yoshikami, CEO of Destination Wealth Management, said on Monday that a larger rate cut by the Federal Reserve would indicate the central bank's readiness to take action, but it would not signal deeper concerns about a broader economic downturn.

Yoshikami stated in an interview, "I wouldn't be surprised if they cut rates by 50 basis points directly, which shows that the Fed is taking necessary measures to support job growth." He added, "I think the Fed is now ready to act preemptively."

Prior to his remarks, Nobel laureate Joseph Stiglitz also made similar comments last Friday, suggesting that the Fed should cut rates by 50 basis points at its next meeting and criticizing the Fed's previous policy tightening as "too fast and too severe."

The market widely expects the Fed to cut rates at the meeting on September 17th to 18th, but the extent of the cut remains uncertain. The weak employment report last Friday heightened concerns about a slowdown in the labor market, leading to speculation of a larger rate cut, which then normalized.

According to the CME FedWatch Tool, traders currently estimate a 75% probability of a 25 basis point rate cut in September, with a 25% probability of a 50 basis point cut.

Yoshikami acknowledged that a larger rate cut could exacerbate concerns about a U.S. economic recession, but he insisted that this view has been exaggerated. He pointed out that the unemployment rate and interest rates remain historically low, and corporate profits have been strong.

Recently, the S&P 500 index had its worst week since March 2023. Yoshikami believes that this sell-off was based on the "huge profits" accumulated last month. Despite major stock indices rising in August and significant market volatility at the beginning of the month, September traditionally tends to be a weaker trading period.

Thanos Papasavvas, Founder and Chief Investment Officer of ABP Invest, also admitted to increased concerns about a potential U.S. economic recession.

The research firm recently adjusted its probability of a U.S. economic recession from "mild" at 25% in June to "relatively manageable" at 30%. However, Papasavvas stated that the fundamental components of the economy - manufacturing and unemployment rates - "still show resilience."

Papasavvas said on Monday, "We are not particularly worried about the U.S. heading into a recession." These views contrast sharply with those of other market observers.

Lagarias, Chief Economist at Forvis Mazars, stated, "I don't see the urgency for a 50 basis point rate cut." He added, "A 50 basis point rate cut could send the wrong message to the market and the economy. It could convey a sense of urgency, you know, it could become a self-fulfilling prophecy."