Wall Street has grown anxious as speculation that the Federal Reserve will cut interest rates grows.
The Fed is anticipated to cut interest rates for the first time since 2020, though it’s not known by how much. The uncertainty around the Fed’s next move has caused stock and bond markets to become volatile, after an extended period of stability, the Wall Street Journal reported.
“Markets have been on edge for the last month or two,” Rick Rieder, chief investment officer for fixed income at BlackRock, told the outlet. “You’ve seen bonds move rapidly from a sanguine view to recession.”
The Fed tends to cut interest rates to stimulate the economy and stave off a recession, though this isn’t always guaranteed. In July, the S&P 500 saw its best and worst days since 2022, including a sudden crash in Japanese stocks that quickly recovered.
Recent economic data has stock and bond markets disagreeing on whether or not economic data shows an overheating economy cooling down, or the opening pangs of a recession.
One major cause for alarm is the triggering of the Sahm rule — an indicator of a looming recession. It is triggered when the three-month moving average of the unemployment rate rises half a percentage point relative to its minimum point over the past year. The Sahm rule has been triggered for two months in a row.
Job growth has also slowed in recent months, helping increase the unemployment rate from recent lows of 3.4% to 4.2%.
Last month, Federal Reserve Chairman Jerome Powell announced his intention to cut interest rates for the first time in over four years.
“We do not seek or welcome further cooling in labor market conditions,” he said. “The time has come for policy to adjust.”
Powell argued that inflation had come down to a manageable level.
“Inflation is now much closer to our objective, with prices having risen 2.5% over the past 12 months,” he said. “After a pause earlier this year, progress toward our 2% objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2%.”
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The fear is that the Fed waited too long to cut interest rates to stave off a recession, though few are bullish on the prospect.
“I see two possible outcomes here: We have a soft landing and the Fed can slowly cut interest rates like they intend. Or, there’s maybe a 30% chance it all goes horribly wrong, we slide into a recession and the Fed panics and cuts very aggressively,” David Kelly, chief global strategist at J.P. Morgan Asset Management, told the outlet. “I think what you’re seeing in the futures market is a sort of weighted average of those two views.”