Rate cut frenzy envelops Wall Street, "recessionary rate cuts" have been fully priced in!

This week, the market's violent fluctuations have raised concerns about the spread of crisis and economic recession, leading to a renewed demand from Wall Street for a rate cut by the Federal Reserve.

As the market turbulence begins to calm down, another concern is emerging —investors are expecting a significant rate cut by the Federal Reserve, which could bring another pitfall to the market.

Diane Jaffee, a senior portfolio manager at TCW, said in an interview, "I don't think Fed officials want to be seen as 'acting impulsively.' This is not what the Fed wants to do."

Earlier this week, Wall Street was focused on the possibility of an emergency rate cut by the Fed before its policy meeting on September 17-18. Jaffee pointed out that the lower-than-expected initial jobless claims data released on Thursday made this dramatic move seem less likely.

Jaffee believes that September seems to be the "most obvious" time for the Fed to start cutting rates. While she does not rule out the possibility of a 50 basis point rate cut by the Fed, TCW's baseline forecast remains a 25 basis point cut. She added, "They want to get it right."

Since the unemployment rate rose to a three-year high of 4.3% in July triggering the Sam rule, investors have been on edge. This was followed by the sudden unraveling of the popular yen "carry trade" on Monday, leading to global stock market turmoil and shocking the financial markets. On the same day, the S&P 500 index recorded its worst single-day decline in about two years, US bond yields plummeted, and investors sought safe havens. The VIX index, known as the Wall Street "fear gauge," also soared.

As volatility gradually subsided, the stock market narrowed its weekly losses, with Morgan Stanley analysts estimating that three-quarters of global carry trades had been unwound by Wednesday.

Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, said, "I think there are people buying stocks optimistically," but the US labor market is weakening. At the very least, investors should be prepared for volatility and adjust their risk exposure to guard against losses in case the US falls into a recession.

According to CME Group's FedWatch Tool, as of Thursday, traders were pricing in a nearly 60% probability of a 50 basis point rate cut by the Fed in September, a month ago this probability was less than 5%. In this scenario, the federal funds rate would be lowered to between 4.75% and 5%.

The Fed has kept its policy rate at a 20-year high of 5.25% to 5.5% for over a year without triggering a recession. However, according to researchers at Societe Generale, recessionary rate cuts have already been fully priced in by the market.

Recently, the interest rate swap market has begun to reflect a cut of over 100 basis points by the Fed within the next six months . Jitesh Kumar from Societe Generale's equity derivatives strategy team stated in a client report on Thursday that despite some easing from the worst levels since Monday, the US is still "in the recession category." Kumar said, in other words, traders "won't wait and see" if a recession is possible, he believes that Wall Street may once again be ahead of the curve in anticipating a significant rate cut. If economic data fails to meet expectations of a recession, the market may experience another round of turbulence.