As turmoil swept through global financial markets on Monday, fueled by concerns that the economy is headed for a hard landing, investors began to speculate that the Federal Reserve could jump in to cushion the fallout with an emergency interest rate cut.
But a market sell-off is unlikely to prod the Fed to lower rates before its Sept. 18 meeting, especially at a time when economic data have yet to show conclusively that the economy is entering a recession.
The latest jobs report does leave officials with worrying evidence that the job market is slowing. But it was just one month of data, and it came at a time when consumer spending is holding up. Given that — and given how high the bar is for the Fed to cut rates outside of regularly scheduled meetings — Fed officials and careful Fed watchers suggested that the jump in unemployment and the sell-off in stocks were unlikely to be enough to spur an emergency inter-meeting move.
“We’ve got to be monitoring the real side of the economy: There’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview on Monday afternoon.
The Fed calls unscheduled meetings to adjust interest its policy stance only in extreme situations. The most recent instance happened on March 15, 2020, when central bankers slashed borrowing costs to near zero as the onset of the coronavirus pandemic sent panic coursing across global markets and caused a widespread breakdown in how markets functioned.
Monday’s sell-off was far less drastic than that moment. Investors dumped stocks because they have become nervous that the economy might fall into a recession after a few weak economic data releases in the United States, including a jobs report last Friday that showed unemployment rising. But even as they sank, markets continued to trade in an orderly fashion.
Still, the sell-off was a symptom of a problem that Fed officials are watching cautiously. Joblessness rarely rises sharply outside of an economic downturn, making last week’s employment report concerning.
The data have fueled serious concerns that Fed officials have fallen behind on adjusting their policy stance. Central bankers have held interest rates at 5.3 percent for a full year, a relatively high setting that is making it expensive to borrow to buy a home or expand a business. The risk is that Fed policymakers might have choked off demand too much for too long, causing a slowdown in the labor market that will begin to snowball into wider economic pain.
“We’ve now confirmed that the labor market is slowing, and it’s extremely important that we not let it slow so much that it tips itself into a downturn,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said on Monday evening. She added that it was not yet clear just how serious the labor market slowdown would prove.
While a rate cut at the Fed’s September meeting was widely expected even before the employment report last week, traders now see a large reduction of half a percentage point or more — bigger than the quarter-point moves that the Fed tends to announce during normal times.
“People always ask how much — is it 25, is it 50, is it three meetings in a row, is it every other meeting?” Ms. Daly said. The Fed’s policy-setting committee is “prepared to do what the economy needs when we are clear what that is,” she said, “and there’s many more pieces of information that come out between now and when we next meet, and we’ll use all of that information.”
Her comment was important for two reasons: It made it clear that a larger-than-normal rate increase is possible next month. But it also threw cold water on the idea that the Fed might cut interest rates before its scheduled meeting, as some investors guessed on Monday that it might.
Several longtime Fed watchers pointed out that the central bank tends to make emergency moves between meetings only when there is a risk that markets are going to stop functioning properly, not just because stock prices are falling.
“I think what you generally find is that they tend to happen in periods of credit market disruption and financial system freezing up — right now, markets are having not a good day, but I think it’s orderly,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
Mr. Goolsbee, from the Chicago Fed, said the idea of an inter-meeting rate cut was “outside of” his “wheelhouse,” but also emphasized that the stock market was overreacting to “one data point.”
Mr. Goolsbee also noted that jobs numbers come with a margin of error — the numbers can jump around for quirky reasons, and they get revised — and suggested that it was too early to draw firm conclusions from July’s report.
But both he and a wide array of economists have been watching other data as they begin to show signs that the economy is beginning to weaken.
Jobless claims have moved higher. Manufacturing activity is showing evidence of a cool-down. And while growth and consumer spending have held up so far, those tend to be slow to adjust at the start of economic pullbacks.
Given the mounting evidence that the economy might be on the cusp of softening, there is a risk that it will look in hindsight like the Fed waited too long to begin reducing rates.
Although officials discussed cutting borrowing costs at their meeting last week, they held off, choosing to wait for some final confirming evidence that inflation is fully under control, hopeful that the economy was strong enough for them to take their time.
That timing proved to be unfortunate. In the two days immediately after policymakers made that decision, reports showed a pop in jobless claims and a jump in the unemployment rate. Officials would not have had the employment report in hand as they were making the decision.
“There are no mulligans in monetary policy, unfortunately, but we’ll probably look back and say, yes, they waited too long,” Mr. Feroli said. “In real time, it didn’t seem obvious.”