Is a 50 basis point cut a "bad thing"? Analyst: This is a "positive" signal, showing that the Federal Reserve is supporting employment

Wall Street News previously mentioned that some analysts believe that if the Federal Reserve chooses to cut interest rates by 50 basis points next week, it will solidify expectations of a US economic recession, inevitably causing market panic. In Wall Street, this view has been opposed by some analysts and economists.

Michael Yoshikami, CEO of Destination Wealth Management, believes that a 50 basis point rate cut would indicate that the Federal Reserve is ready to take action and would not signal an economic recession.

Yoshikami stated in an interview with CNBC on Monday:

"I wouldn't be surprised if the Federal Reserve raised rates by 50 basis points. On one hand, this would be seen as a very positive signal that the Federal Reserve is taking necessary steps to support job growth. I believe the Federal Reserve is currently prepared to address this situation."

Similarly, Nobel laureate in economics Joseph Stiglitz stated on Friday before the non-farm payrolls report was released that the Federal Reserve should cut rates by 50 basis points at the September meeting, as he believes the Fed's previous policy tightening was 'too much, too fast'. He also believes that a significant rate cut would help address inflation and employment issues.

The August non-farm employment report presented a mixed picture, with a slight decrease in the unemployment rate but unexpectedly weak job growth, reinforcing the view of a deteriorating labor market. The probability of a 50 basis point rate cut has risen to over 40%.

As of now, according to the CME Group's FedWatch tool, traders currently estimate a 75% probability of a 25 basis point rate cut in September, while the probability of a 50 basis point rate cut has fallen to 25%.

Is Recession Panic Exaggerated?

Yoshikami acknowledges that a significant rate cut may exacerbate concerns about a hard landing, but he insists that this view is exaggerated, pointing out that unemployment and interest rates remain historically low, and corporate profits have been strong.

He mentioned that last week the S&P 500 index had its worst week since March 2023, mainly due to investors taking profits on a large scale. In August, despite significant volatility at the start, all major indices rose, and September is traditionally a weaker trading period.

Thanos Papasavvas, founder and chief investment officer of ABP Invest, also acknowledges that concerns about an economic recession have intensified. Earlier, the research firm raised the likelihood of a US economic recession from a "mild" 25% in June to a "relatively manageable" 30% However, Papasavvas told CNBC on Monday that the manufacturing sector and the unemployment rate "still have resilience" and will provide support to the U.S. economy.

We are not particularly worried about the U.S. economy falling into a recession.

Is a significant rate cut "very dangerous"?

Compared to the analysts above, George Lagarias, Chief Economist at Forvis Mazars, is more cautious and pessimistic. He stated that a 50 basis point rate cut could scare the financial markets.

In the mixed situation of the U.S. economy, George Lagarias "firmly" stands in the camp calling for a 25 basis point rate cut. He believes that the current economic situation does not warrant a 50 basis point rate cut urgency. He stated:

"If the Fed significantly cuts rates by 50 basis points, it may send a wrong signal to the market and economic participants, leading them to mistakenly believe that the economic situation is very severe, triggering panic. This could be a 'self-fulfilling' prophecy, causing the economy to actually enter a recession."

Previously, Mohit Kumar, Chief Financial Economist at Jefferies Europe, also stated that the Fed "definitely does not need" to cut rates by 50 basis points in September