Federal Reserve Chairman Jerome Powell announced that interest rates will remain unchanged during a press conference at the William McChesney Martin Federal Reserve Building in Washington, DC, on June 12, 2024.
Kevin Dietsch Getty Images
Deeper interest rate cuts from the Federal Reserve this month could shock financial markets and send the wrong message about recession risks, according to one economist.
It comes as policymakers at the US central bank are expected to start lowering interest rates when they meet on September 17-18, with investors closely monitoring economic data for an indication of just how big a rate move they are likely to send.
George Lagarias, chief economist at Forvis Mazars, told CNBC on Thursday that while there is no guarantee of the size of the Fed’s interest rate cut at the upcoming meeting, he is “firmly” in the camp calling for a quarter reduction.
“I don’t see the urgency for the 50 (basis point) cut,” Lagarias said.
“A cut of 50 (basis points) can send the wrong message to the market and the economy. It can send a quick message and, you know, that can be a doable forecast,” he said. The basis point is 0.01 percentage point.
“So, it would be very dangerous if they go there without a specific reason. Unless you have an event, which disturbs the market, there is no reason to panic.”
How big is the Fed’s rate cut?
The Fed’s benchmark lending rate, which affects many other rates consumers pay, is currently targeted at a range between 5.25%-5.5%.
Atlanta Federal Reserve President Raphael Bostic on Wednesday signaled readiness for the central bank to begin lowering interest rates. His comments came ahead of Friday’s influential nonfarm payrolls report.
Strategists have typically said the most likely outcome of the Fed’s upcoming meeting is a rate cut of 25 basis points, although recent economic data appears to have strengthened the case for a bigger move.
Data published Wednesday showed that U.S. job vacancies fell to their lowest level in 3½ years in July, seen as a sign of slack in the labor market.
Market participants have priced in a strong rate cut at the Fed’s next policy meeting, although bets increased for a reduction of half a point after the release of the Job Openings and Labor Turnover Survey, or JOLTS, report.
Traders are currently pricing in a roughly 59% chance of a 25 basis point rate cut in September, with a 41% chance of a 50 basis point rate cut, according to CME Group’s FedWatch Tool.
‘A long way from recession’
Ahead of the next monthly job report, investors are also likely to assess a fresh set of economic data. The readings include ADP employment figures for August, the latest weekly initial jobless claims and Institute of Supply Management services data for August.
“There’s a downturn that’s happening, there’s no question about it, but I think it’s a long way from a recession. I know that there are signs of a downturn in the job market, some of it … has to do with an increase in supply rather than a decrease in demand,” Lagarias told CNBC ” Squawk Box Europe” Thursday.
“Yes, job vacancies are weaker, and manufacturing is weaker, but we expect this slowdown (and) everyone expects this slowdown. There is no evidence for a recession and, so far, I don’t think the Fed is going to move very aggressively.”
Lagarias isn’t the only Fed cautioning against a half-point reduction this month.
Mohit Kumar, chief financial economist for Europe at Jefferies, told CNBC on August 13 that there was “absolutely no need” for the Fed to cut by 50 basis points at the September meeting.
– CNBC’s Jeff Cox contributed to this report.
