Author: Thomas Carreras, DL News; Translated by: Tao Zhu: Wuzhu, Jinse Finance
Global markets fell sharply on Monday, panicking investors and fueling speculation that the Federal Reserve may need to intervene quickly.
" I'm calling for an emergency 0.75% cut in the federal funds rate, and another 0.75% cut next month at the September meeting - that's the minimum," Jeremy Siegel, chief economist at WisdomTree, told CNBC.
“The federal funds rate should be between 3.50% and 4% right now,” he added — not between 5.25% and 5.50%.
Siegel's comments came as Japan's two main stock indexes, the Nikkei and the Topix, closed down more than 12%, their biggest one-day declines since the 1987 stock market crash.
U.S. stock indexes were also hit hard, with the S&P 500 and Nasdaq falling 4.2% and 6.3% respectively, although they have since recovered slightly.
Cryptocurrencies were also hit hard, with Bitcoin and Ethereum briefly falling 15% and 20% to their highest levels since February.
While some investors, such as BitMEX co-founder Arthur Hayes, blamed the sell-off on the Bank of Japan’s monetary policy, recent economic data also suggests the U.S. could soon fall into a recession.
The problem, Siegel argues, is that the Fed kept the federal funds rate too high for too long.
In its fight against inflation, the U.S. central bank has restricted liquidity in the financial system to the point where it is hurting the economy, or so the perception goes.
Siegel isn't the only one who thinks the Fed needs to quickly ease liquidity conditions.
Brian Rudick, senior analyst at cryptocurrency trading firm GSR, noted: “If the Fed determines that current policy is too tight, it may take emergency inter-meeting rate cuts.”
The impact of rate cuts on cryptocurrencies would be positive, as Bitcoin tends to perform well when liquidity is plentiful. Ruddick said an emergency rate cut would also "demonstrate the Fed's willingness to act."
Traders are pricing in a 100% chance of a September rate cut by the central bank and an 83.5% chance of a 0.5% cut, according to CME FedWatch data.
Don't panic
But Sarah Hunt, founding partner and chief market strategist at asset manager Alpine Saxon Woods, said an emergency rate cut could do more harm than good.
“ The concern is that an emergency rate cut by the Fed — or over-intervention — will now make people more worried and not necessarily help, ” Hunt told Bloomberg.
She said the poor manufacturing data and worrisome employment figures were just two pieces of a larger puzzle.
Japan’s monetary policy, tensions between Israel and Lebanon and the unwinding of leveraged trades are also shaking markets — factors that have nothing to do with the Fed.
“If the Fed had cut rates last week, you might have had a smaller problem, but the direction would still be down,” Hunt said.
Jake Ostrovskis, an over-the-counter trader at cryptocurrency market maker Wintermute, noted that an emergency rate cut could cause market panic, whether necessary or not.
Ostrovskis said such a rate cut would "indicate panic or excessive concern about the economy and could undermine confidence in the central bank."
This, in turn, will "create uncertainty and increase market volatility for all assets — especially long-dated assets like cryptocurrencies," he said.
Noelle Acheson, former head of market insights at Genesis Global Trading, shared a similar sentiment.
“An emergency rate cut would send a panic signal, which would not bode well for the U.S. central bank,” she wrote on X. “Imagine the panic if the Fed does an emergency rate cut and it fails to stop the rout.”
