The September Federal Open Market Committee (FOMC) has become a hot topic among investors, with many believing the FED will finally begin lowering interest rates.
There have been numerous different opinions on just how large the cuts ought to be, and one prominent expert – Veronica Clark of Citigroup (NYSE: C) – not only believes that 50 basis point (BPS) reduction is merited but also that America’s Central Bank is already behind the curve.
The Citigroup economist, however, acknowledged that a 25 BPS decrease may be more realistic as it would be easier to find a consensus within the FED for the more modest move.
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Still, Clark emphasized the importance of initiating funds rate reductions of any size as she stated that the recent employment figures are already concerning – albeit not frightening – and that further delays could turn into a prelude for a recession.
Markets show major concerns over U.S. employment
Citigroup’s economist is far from the only one to have pointed out the issues with the labor market, and perhaps the most dramatic reaction to the development came from investors themselves.
Both in early August and in early September, the U.S. stock market experienced significant shocks as it underwent brief but stark plunges upon the release of the monthly jobs reports.
The latter downturn can be interpreted as particularly concerning as it, in fact, featured another worrying announcement – the relative weakening of the American manufacturing sector.
Could stubborn inflation spoil the expected rate cuts?
On the matter of inflation, the Citigroup economist explained in a recent appearance on CNBC that the FED’s failure to achieve its target rate of 2% should not dissuade it from initiating rate cuts, as other metrics have been steadily worsening.
Another interesting facet of the upcoming FOMC meeting is that while most of the market is eying a 25-50 BPS cut, Senator Elizabeth Warren has been calling for a significantly more radical step.
In a letter to Chair Jerome Powell, dated September 16, Senator Warren urged a 75 BPS reduction, citing the weakening employment figures and, while acknowledging that inflation is not yet at 25, it is moving in the right direction.
Additionally, much like Veronica Clark, Warren also warned that FED may not only be late with initiating reductions, but also too late.
Dissenting expert describes lowering interest rates as ‘insanity’
Despite the widespread belief rate reductions are not only imminent but also imperative, not all experts agree.
Gordon Johnson of GJL Research, in an X post published on September 17, described even considering such a move as ‘insanity.’
In his analysis, Johnson pointed toward reports issued by multiple major corporations, including McDonald’s (NYSE: MCD), Home Depot (NYSE: HD), Best Buy (NYSE: BBY), and many others, indicating that the American consumer is ‘cracking.’
The head of GJL Research also opined that rate cuts would reignite inflation in the U.S. and will when paired with the likely impact on earnings, stagflation.
Finally, he warned that lowering the funds rate will ‘put the upper-middle and middle-class into the “poor” category, and absolutely destroy the poor.’
Johnson has been a vocal critic of the Federal Reserve’s policy toward inflation, generally calling it too relaxed and, in some way, self-defeating. In February 2024, he predicted the rate would reach almost unprecedented highs in the coming years and described the phenomenon as the ‘most predictable forthcoming inflation crisis ever.’
Stock market jubilant over expected interest rate cuts
Whatever the results of the meeting may be – and whatever the merits of the various arguments – investors have seemingly already priced in and enthusiastically embraced a lower interest rate environment.
Much like the shock of the previous two employment reports wiped more than $1 trillion from the stock market in early August and September, the anticipation of the FOMC meeting has helped major stock market indices – such as the S&P 500 – and prominent commodities – first and foremost being gold – reach new all-time highs.
The outlook for these assets is similarly positive.
Goldman Sachs (NYSE: GS) recently assessed the S&P 500 is headed for 6,000 points, and Bank of America (NYSE: BAC) gauged that gold might soon hit $3,000.
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