Wall Street big shots debate: Emergency rate cut "highly unlikely", can expect a 50 basis point rate cut

Speculation about an emergency rate cut by the Federal Reserve before the September meeting has been rampant in recent days, as the previously released July non-farm payroll data came in below expectations, causing investors to worry about the prospect of an economic recession. According to the CME FedWatch tool, the market is pricing in a 50 basis point rate cut at the September meeting, which is the most likely scenario.

But is this reality? Here are the latest views from six experts:

Former New York Fed Chair William Dudley: Fed Needs to Act Promptly, 50 Basis Point Rate Cut Possible in September

Former New York Fed Chair William Dudley continues to maintain a dovish stance. Just two weeks ago, he was advocating for the Fed to maintain higher rates for a longer period, but changed his mind at the end of July, suddenly calling for a rate cut.

On Thursday, he published a column stating that the Fed "needs to get to neutral." The FOMC members estimate the neutral rate to be between 2.4% and 3.8%, while the current effective federal funds rate is at 5.3%.

Dudley said that if an economic downturn occurs, the Fed would need to move into accommodative territory—down to 3% or lower. He stated that an immediate rate cut is necessary, but "very unlikely." He suggested that in order to reach the neutral rate, the Fed may cut rates by 25 or 50 basis points in September and continue to adjust based on data.

Former IMF Senior Researcher Desmond Lachman: 50 Basis Point Rate Cut in September, Emergency Cut is Catastrophic

Lachman believes that given the increasing risks of a recession, the Fed should have cut rates at the July meeting, but he argues that an emergency rate cut before September would do more harm than good.

"The Fed could cut rates during the meeting, but that would be because the sky is falling. If the sky is not falling, the Fed doesn't want to give the impression that it is," Lachman told Business Insider on Tuesday.

"Because they are behind the curve, what I think they should do in September is not cut by the usual 25 basis points, they should cut by 50 basis points."

Jeff Muhlenkamp, Portfolio Manager at Muhlenkamp Fund: Unlikely to Cut Rates Prematurely

Muhlenkamp told Business Insider on Monday that the Fed is not too concerned about the performance of the stock market—especially as U.S. stocks are still at recent record highs—so it is unlikely to cut rates prematurely.

"Despite a lot of exciting things happening in the market, I think unless some serious issues start to spill over into the mainstream economy, the Fed is not overly concerned," he said. "They are willing to let the market self-correct to a new vision of the future," he added.

Ian Shepherdson, Founder and Chief Economist at Pantheon Macroeconomics: If Early Action is Taken, a 50 Basis Point Rate Cut is More Likely

Sheffield's view is similar to Rahman's, he said it is unlikely to see an emergency rate cut as this may send investors the wrong message.

In a client memo on Monday, he said: "In the past 30 years, three-quarters of easing policies have been implemented at scheduled meetings. Usually, even if Fed chairs expect to ease policy, they wait. Previous chairs may have been concerned that rushing to ease policy would exacerbate fears of an economic downturn. If Mr. Powell were to react to a weak jobs report, it would make his statement from last week's press conference that 'the FOMC will rely on data, not on a single data point' absurd."

He said that the economy or stock market must deteriorate further for the FOMC to intervene early.

"Another slightly weaker economic data point is needed, or financial market pressures intensify, for the Fed to take action. If the Fed chooses to act early, we believe policymakers may opt for a 50 basis point rate cut," Sheffield wrote.

LRT Capital founder Lukasz Tomicki: Stock market volatility not due to recession, Fed does not need to cut rates

Tomicki believes that recession fears are not the main driver of stock market volatility, so the Fed does not need to cut rates.

"I believe the current selling is due to the unwinding of yen carry trades and should not affect the Fed's decision," he said in an email to Business Insider.

"In 1998, despite good domestic conditions in the U.S., the Fed still made an emergency rate cut due to the Asian financial crisis, leading to two years of madness in the 1998-1999 markets, resulting in the overinflation of the dot-com bubble and subsequent madness. It is important for the Fed not to repeat past mistakes, not to react to every small issue in the market."

John Sheehan, Vice President and Portfolio Manager of Osterweis Strategic Income Fund: Employment data fairly manageable, not enough to warrant a rate cut

Sheehan said recent employment data is not bad enough to prove the need for a rate cut, and investors should consider the current data in the overall context.

"When the Fed makes an emergency rate cut, it is a very extreme event," Sheehan told Business Insider.

"It's important to keep perspective on where we are right now," he said. "The S&P 500 index is still up about 9% year-to-date. Yes, there have been disappointing job numbers, but the unemployment rate remains at 4.3%. So these are fairly manageable figures."

He added, "We haven't seen a compelling reason why they couldn't wait another six weeks before cutting rates again until the September meeting."