Global panic, but the Federal Reserve remains calm: Slowing down but not plunging off a cliff!

San Francisco Fed President Daly said on Monday that the labor market is slowing down and hinted that the Fed should start cutting interest rates in the coming quarters, but did not conclude that the labor market has been severely weakened.

"Policymaking adjustments will be necessary in the coming quarters," Daly said during a discussion co-hosted by the Hawaii Executive Collaborative on Monday.

"We have now confirmed that the labor market is slowing down, and it is very important that we do not let it slow down to the extent that it falls into a recession," she said, adding that how much and when the Fed will have to cut interest rates will "largely depend on the upcoming information."

Daly emphasized that she still sees strength in the job market. She said that companies have slowed down hiring new employees, but most companies have not laid off workers.

"We have a fairly stable labor market," Daly said. "Behind the labor market report, there is more room for confidence - we are slowing down but not falling off a cliff."

Her comments came after the U.S. non-farm payroll report fell short of expectations last Friday, sparking recession concerns and triggering a global stock market plunge. Her views are in line with other Fed officials who have been speaking since the July data release, warning against "overinterpreting a month's employment report." Also speaking on Monday, Chicago Fed President Evans reiterated that the Fed's job is not to react to one month of labor data, adding that the market is more volatile than the Fed's actions. Evans said there are some warning signs, such as an increase in consumer delinquencies, but "economic growth remains at a fairly stable level." Evans is one of the most dovish members of the rate-setting committee.

Daly pointed out that mortgage rates have fallen after the employment report was released, proving that the Fed is communicating effectively and that policies are working.

"Now, the market may swing too much in one direction or another, but I think what's important is the reaction function - how we will balance our two goals, and it's very clear that rates have been adjusted," she said.

Two days before the new employment data was released, Fed policymakers kept rates unchanged at their highest level in over two decades but indicated they are closer to cutting rates. Powell said rates could be lowered at the September meeting. Based on officials' comments on Monday, despite the global market downturn, traders and investors are urging them to take more, faster, and earlier action, but initial signs suggest that Powell and his team are unlikely to be swayed.

In contrast, some economists, including economists from Citigroup, JPMorgan Chase, and Wells Fargo, now expect a 50 basis point rate cut at the September and November meetings.

UBS currently expects the Fed to cut rates by 100 basis points this year, higher than the previous forecast of 50 basis points. UBS said in a report that unless the August employment report shows strength, UBS believes the Fed will start a easing cycle at the September meeting, cutting rates by 50 basis points "Our basic judgment remains that the U.S. economy will avoid a recession, and the growth rate will stay close to the trend level of around 2%. With interest rates at a 23-year high, the Federal Reserve has enough flexibility to support the economy and the markets." UBS emphasized that overall household financial conditions are good, real incomes are growing, average debt servicing costs remain low compared to historical averages, and total net wealth has increased by 37% since the start of the pandemic.

Bank of America, on the other hand, believes that the Federal Reserve does not currently need to cut interest rates to the scale of an economic recession. The Bank of America Securities brokerage team stated in a report that the Fed's rate cut in September is a done deal, but there is no need for aggressive rate cuts that would lead to an economic recession. The rise in the July unemployment rate was mostly due to temporary layoffs, indicating only temporary weakness. The August employment report may show a rebound in employment rates and a decrease in the unemployment rate. They said, "Without layoffs, the U.S. will not experience an economic recession, and the layoff rate remains extremely low." Bank of America believes that the rate-cutting cycle will start in September, with a 25 basis point cut each quarter, until reaching a terminal rate of 3.25%-3.5% by mid-2026. "Rate cuts of 50 basis points or more are done in emergency situations, and action is taken between meetings, but we are not there yet."