If Tension Spreads Markets, It Could Trigger Emergency Fed Rate Cuts

After last week's massive sell-off, markets are still on edge, with investors divided over expectations of a 50 bps and 25 bps rate cut in September. Danielle DiMartino Booth, CEO and chief strategist at QI Research, warned that if it spreads to other markets, “all is hard to predict ”

DiMartino Booth said the Fed is lagging in monetary policy easing and will be forced to play catch-up.

DiMartino Booth said: “I don't think they have a choice before 18 September, they will have to cut rates by 50 basis points. They can try to say something mean, but as the momentum of the data continues, they're going to run out of options at some point, or they're going to look completely retarded or numb, really, for lack of a better word.”

After Wall Street experienced its worst day since 2022 early last week, some market participants began to question whether the Federal Reserve would be forced to make an emergency rate cut if the market became more volatile.

DiMartino Booth warned that an emergency rate cut by the Fed could lead to unintended consequences as it would confirm investors' worst-case scenarios for the US economy.

She explained, “If the Fed were to make an emergency rate cut now, it could confirm investors' worst fears. They might say, 'Gee, the Fed thinks things are so bad that they have to do something that usually only happens in a financial crisis,' and a small collapse in the U.S. stock market is not a reason for the Fed to consider an emergency rate cut at this time.”

But there exists a scenario in which the Fed might be open to an emergency rate cut, and that is the risk of contagion.

She noted, “If we start to see contagion into the credit markets, it's a completely different story, and Fed Chairman Powell's nightmare is whether bond issuance dries up, which is the Fed's purview. If we start to see credit dry up, that could prompt the Fed to cut rates urgently.”