Strategist lashes out: Fed's move too hasty! Cutting rates by 50 basis points is "too foolish"

Senior market strategist pointed out that the Federal Reserve has no reason to cut interest rates by 50 basis points again. They stated that the latest US employment data indicates that the Federal Reserve may be acting too hastily.

David Roche, founder and strategist of Quantum Strategy, described the Federal Reserve's decision last month to cut the key overnight borrowing rate by 50 basis points as a "knee-jerk reaction."

The non-farm payroll data released last Friday showed that employers added 254,000 jobs in September, far exceeding economists' forecast of 150,000. At the same time, the unemployment rate dropped to 4.1%, a decrease of 0.1 percentage point.

Roche stated that "these data make the Federal Reserve's 'sharp rate cuts look foolish and panicky.'"

"The mistake lies in relying too much on data without strategic vision," he said last Friday, pointing out that unless "something very bad happens," such as the Middle East conflict escalating to the point where Israel bombs Iran's nuclear test site, the "Federal Reserve should not make sharp rate cuts again."

In an interview on Monday, Roche said that the Federal Reserve's actions may do more harm than good because they give a wrong impression of the US economy. He said:

"First, it gives the impression that the US economy is more fragile than it actually is... and the economy is doing well, there is no need for sharp rate cuts. Second, it gives you the impression that the Federal Reserve will continue to cut rates, down to levels far below what will actually be achieved. The Federal Reserve rate will not drop below 4% or 3.5% because the economy is very strong, and businesses can earn enough capital without lower rates."

Roche stated that the Federal Reserve "started with sharp rate cuts," creating the impression that "there will be more 50 basis point sharp rate cuts," which could lead to "market instability when the market realizes this fact."

At that time, the Federal Reserve defended the sharp rate cuts by stating that there were signs of slowing inflation and a weakening labor market. After the non-farm data was released last week, traders' expectations for a sharp rate cut by the Federal Reserve in November had significantly decreased.

The CME Group's FedWatch Tool shows that there is an 87.4% probability that the Federal Reserve will lower the federal funds rate target range by 25 basis points to 4.5% to 4.75%. The tool also shows that there is a 12.6% probability of rates staying at 4.75% to 5%, and a 0% probability of a 50 basis point rate cut. However, a week ago, the probability of a sharp rate cut was 34.7%.

Last month, the Federal Reserve decided to cut its federal funds rate by 50 basis points, the first time since the 2008 global financial crisis that the Federal Reserve has taken such action (apart from its emergency cuts during the COVID-19 pandemic). The Federal Reserve also indicated through its "dot plot" that it will cut rates by another 50 basis points by the end of this year Senior Advisor Bob Parker of the International Capital Market Association agrees with Roche's view that "there is fundamentally no reason for the Fed to actively cut interest rates".

He said, "Let's go back to two basic points. First, the possibility of the U.S. economy entering a recession at least in the fourth quarter of this year and possibly in the first quarter of next year is close to zero. Secondly, overall inflation and core inflation rates will remain above the Fed's 2% target, so there is no reason for an active interest rate cut."

Parker added, "Yes, it makes sense for the Fed to cut rates moderately, it makes sense to cut rates by 25 to 50 basis points in January next year, but there is no reason to cut rates by 50 basis points at the next meeting."

Last Friday, global markets rebounded after the release of U.S. employment data, alleviating concerns about economic slowdown, although analysts warned that the upcoming U.S. presidential election and Middle East turmoil could keep market volatility in the coming weeks.

Dave Pierce, Director of Strategic Planning at GPS Capital Markets, said that although there was "significant volatility" in the market last Friday, with the Dow Jones Industrial Average rising 300 points, the recent significant downward revision of U.S. non-farm payroll data should be a cautious signal. He said in an interview on Monday, "The data doesn't seem as accurate as expected, so while I think employment data is very important, significant, and will indeed affect the outcome of the Fed's next meeting, the market now sees almost zero possibility of a 50 basis point rate cut by the Fed. We see some improvement in the economy, but also signs of a slowdown."

Pierce stated that negative sentiment surrounding the U.S. economy still exists, mainly focusing on inflation and its impact on Americans' daily lives. He said:

"The economy is doing well, no one is saying the U.S. economy is bad, but many people are still struggling, especially due to inflation and how much prices have risen in recent years. I think it is these things that lead to potential sentiment in the market, that the situation is not as good as expected. Because, even though people have jobs and employment, they are still struggling to maintain their daily lives."