Why the Fed almost certainly isn’t going to do an emergency rate cut

Analysis by Elisabeth Buchwald, CNN

New York (CNN) — Stocks closed deep in the red for a second day in a row on Monday as questions swirl over whether the US economy is in a recession following Friday’s unexpectedly weak jobs report. Investors are increasingly hopeful that will push Federal Reserve officials to come to their rescue with an emergency rate cut.

That almost certainly won’t happen.

“There’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable,” Chicago Fed President Austan Goolsbee said in a New York Times interview on Monday.

In hindsight, there’s a strong case to be made for why the central bank should have cut its benchmark lending rate at its meeting last week, which concluded before the jobs report came out. Had officials known the unemployment rate was going to jump from 4.1% in June to 4.3% in July, almost a full percentage point higher than where it was at the start of this year, perhaps they would’ve been more convinced the US economy is weakening enough that the benefits of a cut outweigh the risks.

But calling an unscheduled meeting now to lower rates ahead of the central bank’s next scheduled meeting that’s more than six weeks away would be counterproductive, fueling more panic.

Emergency cuts are rare

The Fed’s rate-setting committee meets eight times a year to vote on where officials believe interest rates should be to promote maximum employment and stable prices.

But if something comes up in between those meetings that changes their views on the ideal level for rates, officials can gather for an unscheduled “emergency” meeting. The last time they did so was at the onset of the pandemic when they voted to lower rates by a half point on March 3. Then, less than two weeks after that, they met again to lower rates by a full point to near-zero levels.

At that point, the writing was on the wall: Things were getting ugly quickly. By doing two large emergency cuts in succession, Fed officials didn’t have to weigh whether their actions would unnecessarily cause Americans to panic.

Before those cuts, the last time the Fed was promoted to do an emergency rate cut was in the thick of the Great Recession shortly after Lehman Brothers collapsed in the fall of 2008.

Optics matter

The last thing the Fed wants is for people to believe the US economy is on the cusp of a potential recession. Those beliefs can quickly materialize, whether or not they are valid.

“As a general proposition, I do not like inter-meeting cuts. I think they signal more panic than they do stability,” Charles Plosser, then president of the Philadelphia Fed said at the central bank’s emergency meeting held October 7, 2008. But he said he was “reluctantly” comfortable with an emergency cut since other central banks were doing it.

That’s not the case currently.

Central banks that have cut interest rates recently, including the Bank of Canada, the European Central Bank and the Bank of England, have done so at prescheduled meetings.

So if the Fed were to move forward with an emergency cut, people would inevitably wonder: What does the central bank representing the largest economy in the world know that everyone else doesn’t?

That’s exactly what then San Francisco Fed President Janet Yellen expressed at an unscheduled meeting the Fed held on January 9, 2008.

“I am concerned that it might be taken as a sign of panic by the Committee and somehow wrongly indicate that we have inside information showing that things are even worse than markets already think,” Yellen, who is now Treasury Secretary, said according to a Fed transcript of the meeting.

She also was worried an emergency cut could “be seen as an overreaction to the employment report,” referring to December 2007’s jobs report that came out five days before the Fed met. The report showed the nation’s unemployment rate jumped by 0.3% to 5%. (Ultimately, officials waited until another unscheduled meeting weeks later to lower rates.)

Would an immediate cut even help?

At the October 2008 meeting, Plosser cautioned that cutting rates immediately wouldn’t “make the next couple of months in terms of the overall economy any less painful.”

That’s the case today, too.

To a certain extent, it won’t matter in the immediate term what size cut Fed officials settle on and the timing of it because it can take roughly a year for any interest rate moves to be felt throughout the economy.

And already, US Treasury yields are sliding a lot in anticipation of rate cuts. Since they serve as a bellwether for the interest rates Americans pay on a range of loans, the dip may help ease the financial burden facing borrowers currently.

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