"And so – despite 50 basis point cuts being used in modern times as 'crisis cuts' (2001, 2007 and 2020) – the Fed chose to cut 50 basis points last week as a 'preemptive' cut, one intended to keep the US economy in good shape and avoid falling behind the curve and into recession.”
Hooper adds that the market does not seem “entirely convinced” that the Fed’s plan will work, particularly as the Fed chairman repeatedly mentioned higher unemployment as a rationale for rate cuts now.
Recession worries
John Velis, macro strategist at BNY Mellon, agrees that the unemployment number will be the crucial indicator.
He says the labour market has probably moved from being too tight – that is, too few employees for the number of available jobs – to a situation of equilibrium, where the number of jobs is roughly equal to the number of employees.
Velis says that if unemployment continues to rise, investors would begin to worry about a recession in the US.
Dan Scott Lintott, investment analyst at De Lisle Partners, says the US economy has grown rapidly in recent years, and any slowdown is a function of having hit record highs.
He says: “The US is the relative strength globally even in its weakness, which is confirmed in the Draghi report.
"At the end of 2023, the US commanded 26 per cent of world GDP to the EU’s 17 per cent.
"From 2002 to 2023, the gap between EU and US GDP growth has widened from 17 per cent to 30 per cent. Thus, it would be folly, as ever, to think the US is weak.
"We think investors should not panic based on recent softening economic data.
"The state of the economy, and whether there is a recession, is largely in the Fed’s control.
"Nominal GDP growth is robust and both presidential candidates are likely to continue deficit spending, propping up the economy.”
Steven Blitz is chief US economist at consultancy TS Lombard. He describes the rate cut as “the right thing to do”, but says the reaction to it may mean investors become so preoccupied with the threat of recession that the potential for an inflation spike is ignored.
This could occur, he says in a note to clients, if the rate cut leads to a “no landing” economic scenario, whereby the economy, rather than slowing down, which is a “soft landing”, actually grows faster as a result of the rate cuts.
In that scenario, unemployment would likely fall and demand-side inflation would likely rise.
Big bucks?
A feature of the global economy this year has been the relative fall in the value of the dollar against peer currencies, including against sterling.
Some of that is a natural occurrence of cutting interest rates, which reduces the value of a currency when compared with countries that have either not cut rates or cut them at a slower pace.
