Recession fears, market sell-off raise odds of a bigger Fed rate cut

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Circle Squared Alternative Investments' Jeff Sica argues there's a problem in the credit market as he weighs in on the market selloff.

Fears of an impending recession have some Wall Street economists betting that the Federal Reserve will approve an unusually big interest-rate cut when policymakers next meet in September. 

A majority of traders are already pricing in an 84.5% chance of a 50 basis point reduction during the Fed's meeting on Sept. 17-18, according to the CME Group, which tracks trading. Just 15.5% of traders think the Fed will approve a quarter-point cut.

«While we do not think conditions are ripe for the Fed to make an emergency rate cut, the case for a supersized 50 basis point reduction at its next meeting has been bolstered by the recent market turmoil,» said Joe Brusuelas, RSM chief economist.

The new projections come on the heels of the disappointing July jobs report, which showed that total nonfarm payrolls grew by just 114,000 in July, while the jobless rate unexpectedly jumped to 4.3%. The report reignited fears of a slowing economy, because it triggered the so-called Sahm rule, an indicator that is used to provide an early recession signal. 

WALL STREET'S FEAR GAUGE SPIKES TO HIGHEST LEVEL SINCE 2020 AS GLOBAL TURMOIL DEEPENS

The Marriner S. Eccles Federal Reserve building in Washington, D.C., on June 25, 2024.  (Photographer: Ting Shen/Bloomberg via Getty Images / Getty Images)

The rule stipulates that a recession is likely when the three-month moving average of the jobless rate is at least a half-percentage point higher than the 12-month low. 

Over the past three months, the unemployment rate has averaged 4.13%, which is 0.63 percentage points higher than the 3.5% rate recorded in July 2023.