Fed should consider interest rate cuts before downturn becomes irreversible

Recent US Department of Labor data show that 114,000 new jobs were created in the nonfarm sector of the United States in July, the lowest since December 2020, and significantly lower than the expected 175,000, and the unemployment rate rose 0.2 percentage points to 4.3 percent, the highest since October 2021, exceeding the market expectation of 4.1 percent.

As the data raises fears of a recession in the US, the three major stock indexes in New York closed sharply lower on Friday, and the NASDAQ Composite Index in particular fell into correction territory. The three indexes all opened lower again on Monday, with the Dow falling 2.73 percent, the S&P 500 dropping 4.1 percent and the Nasdaq losing 6.36 percent.

Goldman Sachs has since raised the probability of the US falling into recession in the next 12 months from 15 percent to 25 percent. Fears of a looming US economic slowdown led some major Asian stock markets to fall sharply on Monday, with Taiwan's TAIEX index falling 8 percent, and the KOSPI and KOSDAQ indexes of the Republic of Korea falling more than 8 percent, triggering circuit breaker protections that halted trading for 20 minutes.

The weaker-than-expected economic data not only reflects the weakening momentum of the US economy, but also indicates market eagerness for the Federal Reserve to adjust monetary policy. Some economists believe that the longer the US' high interest rate lasts, the greater the financial damage to its economy.

The day the US nonfarm data was released, the Bank of America, Barclays Bank, Citigroup, Goldman Sachs and J.P. Morgan Chase all raised expectations for the Fed to cut interest rates, with some even expecting it to cut interest rates by 50 basis points twice this year.

Cutting interest rates is often taken as a sign that the economy is slowing or at risk of recession. In addition, the fall in US inflation is not necessarily linear, and if inflation data remains high or even rebounds, and the labor market shows signs of weakness, it could limit how far and how fast the Fed will cut interest rates. Even if interest rate cuts in the US become a high-probability event, there is still uncertainty about the specific time, amplitude and follow-up policy path of rate cuts, which will still cause investors to adopt a wait-and-see approach, or even sell stocks to avoid potential risks.

Economic law shows that once the unemployment rate shows a rising trend, it is easy to accelerate the rise and difficult to reverse the trend in a short time through interest rate cuts and other means.

-21st Century Business Herald