Strategists say the Fed has no reason to cut interest rates further | Wilnesh News

A senior market strategist told CNBC that the Fed has no reason to cut interest rates by an additional 50 basis points, adding that the latest U.S. jobs data means the Fed may act hastily.

Quantum Strategy founder and strategist David Roche described the Fed’s decision last month to cut the key overnight borrowing rate by half a percentage point as a knee-jerk move.

Nonfarm payrolls data released on Friday showed that employers added 254,000 jobs in September, far exceeding economists’ expectations of 150,000. At the same time, the unemployment rate fell 0.1 percentage points to 4.1%.

Roach said the data made the Fed’s “significant interest rate cuts look foolish, populist and panicky.”

“The mistake was an overreliance on data and a lack of strategic perspective,” he said in emailed comments on Friday., result, There should be no “further big cuts…unless something really bad happens,” such as the conflict in the Middle East escalating to the point where Israel bombs an Iranian nuclear test site.

Roach told CNBC on Monday that the Fed’s move could be harmful because it would leave the wrong impression on the U.S. economy.

“One, (the impression is that) the economy is more fragile than it actually is … and the economy is fine, thank you very much, and it doesn’t require a big rate cut,” he told CNBC’s “Squawk” Box Europe.

“The second thing it does is give you the impression that the Fed is going to cut interest rates back-to-back to levels well below where they actually are. The Fed is not going to go below 4% or 3.5% because the economy is so strong and businesses You can make enough money without lowering interest rates.

Roach said that by “cutting sharply at the outset” the central bank gave the impression that it was “going to further cut significantly by 50%”, which could lead to “market instability when the market wakes up to this fact”.

The Fed defended the sharp rate cut at the time, saying there were signs that inflation was slowing and the labor market was softening.

Trader expectations for a sharp rate cut in November have fallen sharply following last week’s data.

According to data from the Federal Reserve, there is currently an 87.4% chance that the Fed will lower the target range for the federal funds rate (its key interest rate) in November by 0.25 percentage points to 4.5% to 4.75%. CME Group’s FedWatch Tool.

According to the tool, there is a 12.6% chance of interest rates remaining at 4.75% to 5%, while there is a 0% chance of a 50 basis point rate cut. However, a week ago, the probability of a significant rate cut was 34.7%.

When the Federal Open Market Committee chose to cut the federal funds rate by 50 basis points last month (barring an emergency rate cut during the coronavirus pandemic), it was the first time it had done so since the 2008 global financial crisis. “Arrangement”, which is equivalent to another 50 basis points interest rate cut by the end of the year. The remaining two meetings are November 6-7 and December 17-18.

Bob Parker, senior adviser to the International Capital Markets Association, agreed with Roche that “there is no reason for the Fed to cut interest rates significantly.”

“We come back to two basic points. First, the probability that the U.S. economy will slip into recession at least in the fourth quarter of this year and possibly in the first quarter of next year is close to zero. Headlines and core inflation will remain at the Fed’s 2% above the target, so (there is no reason) to cut interest rates significantly,” he said.

“Yes, there is a case for a modest rate cut, a case for a 25 to 50 basis point cut by January next year, but the case for a 50 basis point cut at the next meeting simply doesn’t exist,” Parker said.

Global markets rose on Friday after U.S. jobs data eased concerns about an economic slowdown, although analysts warned that the upcoming U.S. presidential election and turmoil in the Middle East could lead to increased market volatility in the coming weeks.

Dave Pierce, director of strategic initiatives at GPS Capital Markets, said that although there was a “big move” in the market on Friday, when Dow Jones Industrial Average Up 300 points, the recent downward revision in US non-farm payrolls should send a cautious signal.

“It feels like the numbers are not as accurate as they should be,” he told CNBC on Monday.

“So while I think the (employment) number is absolutely important, absolutely important, and it does affect the outcome of the next Fed meeting — a 50-point rate cut is 100 percent likely — we’re seeing an improvement in the economy. , but also saw some slowdown.

Pierce said the remaining negative sentiment surrounding the U.S. economy focuses on inflation (2.5% in August) and its impact on Americans’ daily lives.

“The economy is doing very well, no one is saying the U.S. economy is bad, but there are still a lot of people who are struggling, especially with inflation and rising prices in recent years,” he said.

“So I think things like that contribute to the underlying sentiment in the market that things are not as good as they should be. Because even though people have jobs and they have jobs, they’re still trying to make money.” Day-to-day things (work) .

—CNBC’s Jeff Cox and John Melloy reported on this article.