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Today, stock markets experienced a loss close to 3 trillion dollars. Trillion-dollar giants saw significant declines. The recent earnings reports and the looming recession concerns in the US are fueling these declines. Fed increased interest rates very quickly and is slow to reduce them despite inflation dropping to 3%. This situation is not good for the global economy.
Fed Needs to Act
Even in this week’s last meeting, Powell did not give a definite signal for a rate cut. When today’s employment data is read together with the Fed’s stance, this is starting to look like madness. Stock markets wiped out 3 trillion dollars due to below-expectation earnings reports, concerns about AI-supported growth, and recession fears. This massive loss did not occur at the same rate in crypto.
A series of losses similar to or even larger than the pandemic collapse could be seen. While stocks have been growing for months, investors are now avoiding risk due to recession concerns. After today’s employment data, FedWatch started pricing in a 50bp cut for September. Citi, JPMorgan, and others are now talking about three rate cuts this year. Fed member Goolsbee is also talking about the need to take action.
“For a long time, we have been saying that we do not want to overreact to one month’s data. The central bank’s duty is to act steadily. If we stay restrictive for too long, we will have to consider the employment mandate. If unemployment rises above 4.1%, the Fed will have to respond to it. The main outlines of the data do not change based on one month’s figures. We are seeing the improvement we want in inflation. I completely understand why markets want to conclude a trend. The size of the rate cut or whether there will be any action will be determined by economic conditions. We will get a lot of information before the next meeting. Trends show that inflation is generally falling and the labor market is cooling. It is no secret that Fed policymakers expect multiple cuts within the next year. When conditions require a cut, it tends not to be just one. Defaults and default situations of small businesses are increasing and are in the warning sign phase.”
The key points to note in this summary are the “cooling in employment” and “small businesses giving alarm signals.” The Fed may soon make reassuring statements to the markets about a cut in September.
