Yesterday, Jeremy Siegel, a Warton Professor known for his market commentary, made a bold call for an emergency 75 basis point Fed cut, followed by another 75 bps in September. However, with the Atlanta Fed Q3 GDP tracker at +2.9% and ISM services data indicating a strong economy, his prediction seems to be an overreaction to recent market volatility.
While Siegel was not alone in his call for aggressive rate cuts, the market now seems to be correcting itself, as the panic subsides. Fed funds futures traders had placed bets on emergency cuts and other dovish measures, but the situation appears to be stabilizing.
Despite the initial market reaction, the possibility of significant rate cuts serves as a safety net for investors. The Fed has ample room to maneuver, with the current Fed funds rate at 5.25-5.50% and quantitative tightening already in progress. This provides reassurance that the central bank can step in if the economy faces serious challenges.
In the past, when inflation was on the rise, the Fed’s hands were tied. However, with inflation now on a downward trend and inflation breakevens at 1.9%, the central bank has more flexibility to support the economy. While the Fed may be slow to act, especially in the face of falling inflation and lower oil prices, the so-called “Fed put” remains a powerful force in the markets.
Overall, the recent market turbulence and calls for aggressive rate cuts highlight the importance of the Fed’s role in supporting economic stability. While some may view the initial reactions as excessive, the presence of a safety net in the form of potential rate cuts provides a sense of security for investors. As the situation continues to evolve, it will be crucial to monitor how the Fed navigates these challenges and supports the economy in the months ahead.
