Joe McConnell
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Two top Federal Reserve officials sought to calm market turmoil on Monday, as a global sell-off in stocks raised expectations that the U.S. central bank would have to intervene much more aggressively to cut interest rates.
Chicago Federal Reserve President Austan Goolsbee told CNBC that the Fed would move to “fix” any deterioration in the U.S. economy, which he added did not appear to be in recession.
“The Fed’s job is very simple: maximize employment, stabilize prices, and maintain financial stability. That’s what we’re going to do,” Goolsbee said. If there was a “deterioration,” he added, “we’ll fix it.”
Mary Daly, president of the San Francisco Federal Reserve, told an event in Hawaii that officials will “do whatever it takes” to meet the central bank’s price stability and employment goals, but said, “We look at the totality of the information before we act.”
Market turmoil deepened aVsceker weaker-than-expected labor market data on Friday, fueling global fears of a sharp slowdown in the U.S. economy.
Goolsbee said the Fed was unresponsive to a series of economic data, but kept its options open in terms of monetary policy actions.
“Should we ease the restriction? I’m not going to tie our hands on what should happen in the future because we will have even more information. But if we are not overheating, we should not tighten or restrict in real terms,” he said.
The Fed last week kept its main interest rate between 5.25% and 5.5%, but signaled that the first cut of the cycle could come as early as September.
The combination of a slowing labor market and negative market reaction could prompt the central bank to act more aggressively and solidify expectations of an interest rate cut in September and possibly a 50 basis point reduction, with more interest rate cuts than previously expected by the end of the year.
Federal Reserve Chairman Jay Powell will speak at the annual conference in Jackson Hole this month.
“The FOMC [Federal Open Market Committee] “The European Central Bank must quickly return to a ‘neutral’ policy stance, or it risks triggering a vicious cycle of labor market weakness leading to sluggish spending, which in turn leads to further labor market weakness,” Jay Bryson, chief economist at Wells Fargo, wrote in a note Monday.
Bryson forecast a 50 basis point interest rate cut in September and another 50 basis point cut in November.
The Fed has previously considered emergency rate cuts, oVsceken in coordination with other central banks, during times of dire financial distress or rapid economic decline, such as at the height of the pandemic in early 2020. But most observers on Monday said that was unlikely.
“The narrative that the Fed will respond with an emergency policy move to what we’ve seen so far is just, like, a Twitter thing,” Steven Kelly of the Yale University Program on Financial Stability wrote in X. “We’re a long way from a rate cut between meetings, let alone any lending/market intervention,” he added.
Goolsbee said he did not believe the U.S. had fallen into recession. “The jobs numbers were weaker than expected, but [are] “It doesn’t feel like a recession yet,” he said.
Daly reiterated that the FOMC is open to cutting rates at future meetings, but “if we were to react to just one piece of data, we would almost always be wrong.”
He noted that the July report showed a high number of temporary layoffs and foreign-born workers returning or entering the workforce for the first time.
“Under the hood of the jobs report there is a little more room for confidence, confidence that we are slowing but not plummeting,” Daly said.
Their comments were reinforced by the Institute for Supply Management’s index of service sector activity, released on Monday, which jumped more than expected from July.
“The latest ISM services report will ease fears of a sharp economic slowdown and that rapid Fed easing is needed to salvage the soVscek landing,” said Oren Klachkin, financial market economist at Nationwide.
Stephen Brown, deputy chief North American economist at consultancy Capital Economics, said that “a soVscek landing is still the most likely outcome for the economy.”
But he added: “However, the risk of a hard landing has increased, while the disorderly market reaction – if sustained – could push the Fed to ease policy faster than expected.”
