An Emergency Fed Rate Cut Would Be A Mistake
The US central bank should ease policy at its next meeting in September, rather than be bullied into acting by a slump in stock markets.
Don’t panic.
Photographer: Michael Nagle/BloombergWith stock markets plunging around the world, traders are talking up the prospect of an emergency interest-rate cut from the Federal Reserve after the US central bank passed up the opportunity to ease policy last week. Not only is this highly unlikely, it would be counterproductive.
This equity downdraft is fundamentally a market positioning unwind, not a response to an economic shock. Swathes of investors have gotten over their skis on over-leveraged trades; from borrowing cheaply in low-interest rate Japanese yen to chasing the bubble in technology stocks, especially anything AI related. It's their Icarus moment.
There’s nothing broken in the US economy, so there's no justification for the monetary authorities to step in and mitigate losses for over-extended equity holders. The fabled "Fed put" is a break-glass lever only to be used in event of a proper emergency — and we're not there yet.