If the Federal Reserve urgently cuts interest rates, it may backfire! Investors need to "take a deep breath"

Market concerns about a US economic recession or slowdown persist, with many financial market participants preparing for a rare and high-threshold event: an emergency rate cut by the Federal Reserve. The last time the Fed made such an adjustment was in March 2020, when the US was just hit by the COVID-19 pandemic. At that time, the Fed cut the borrowing cost by 0.5 percentage points to 1%-1.25% between two interest rate meetings. However, on the same day, the stock market still plummeted significantly, leaving investors uneasy rather than reassured, indicating that even if market participants get what they wish for, things may backfire. The July non-farm payroll report released last Friday showed a mere 114,000 new jobs added in the US, below expectations, with the unemployment rate edging up slightly from 4.1% to 4.3%. Following this data release, speculations about the need for Fed action increased. For instance, Michael Feroli, an economist at Morgan Stanley, wrote in a report that there are "strong reasons to take action" before September 18 or the Fed's next policy update. US traders and investors woke up to a bleak Asian market on Monday. Japan's Nikkei 225 index closed down by 12.4%, marking the largest single-day percentage drop since the "Black Monday" stock market crash on October 20, 1987. The severe volatility in Asian markets was also influenced by a strategy called yen carry trade unwinding, involving borrowing yen and investing in higher-yielding assets. Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York, stated: "The Fed has two mandates, price stability and full employment. It also has a third mandate, financial stability, which only gets attention when there's a problem." Chandler added: "But the threshold for an emergency rate cut is very high. I can't think of a situation where the Fed would take such action without some stability issue. Even though the US stock market is down, overall we are still up for the year. Moreover, considering the Fed needs to restore market confidence, an emergency rate cut aimed at soothing the market could cause even greater panic." Just last Wednesday, Fed officials opted to keep rates unchanged at 5.25%-5.5%. Fed Chair Powell stated that policymakers want more confidence in inflation before cutting rates and pointed out the possibility of a rate cut in September. Gina Bolvin, President of Bolvin Wealth Management Group, noted that while the likelihood of an emergency rate cut is rising, "investors should remember that the fundamentals have not changed much, and last Friday's job report is just one data point." She manages around $380 million in assets. "However, the foreign exchange market is crucial and could be a catalyst for Fed intervention." Borwen wrote in an email: "Investors need to take a deep breath. Corrections are common, despite the rising unemployment rate, it still remains historically low. The Federal Reserve still has the potential to achieve a soft landing, but it is becoming increasingly challenging."