The US Federal Reserve is seen to be able to make a big interest rate cut of 50 basis points next week without causing fear in the market, an analyst said, giving an outlook on the central bank's meeting.
Michael Yoshikami, CEO of Destination Wealth Management, said on Monday that a larger reduction would show that the central bank is ready to act without signaling deep concern about a broader downturn.
"I wouldn't be surprised if they cut rates by 50 basis points," Yoshikami said.
"That will be considered, in one respect, as a positive sign that the Fed is doing what is necessary to support job growth," he said.
The statement followed similar comments on Friday from Nobel Prize-winning economist Joseph Stiglitz, who said the Fed should cut interest rates by half a point at its next meeting, arguing that they had gone "too far or too fast" with previous policy tightening.
Policymakers are widely expected to cut rates when they meet on September 17-18, but the extent of the move remains unclear. A disappointing jobs report on Friday raised concerns about a slowing labor market and changed market expectations for a bigger cut, before stabilizing.
Traders now predict a 75% chance of a 25 bps rate cut in September, while another 25% expect a 50 bps cut, according to CME Group's FedWatch Tool. One basis point is 0.01 percentage point.
Yoshikami acknowledged that a larger cut could reinforce fears of a "recession" scenario looming, but he stressed that such views are overblown, given that unemployment and interest rates are still low compared to historical levels and company profits remain strong.
He said the recent massive sell-off in the market, which saw the S&P 500 post its worst week since March 2023, was based on "huge gains" made last month. August saw all major indices post gains despite a shaky start to the month, while September is traditionally a weaker trading period.
Thanos Papasavvas, founder and chief investment officer of ABP Invest, also admitted there was "increasing concern" about a possible economic downturn.
The research firm recently adjusted the likelihood of a US recession to a "relatively contained" 30% from a "mild" 25% in June. However, Papasavvas said that the basic components of the manufacturing economy and the unemployment rate are still "resilient."
