Federal Reserve officials move to reassure markets that US is not in recession

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Two senior Federal Reserve officials sought to calm market turmoil on Monday as a global sell-off in equities triggered expectations that the US central bank would have to step in much more aggressively to cut interest rates.

Austan Goolsbee, the president of the Chicago Fed, told CNBC the Fed would move to “fix” any deterioration in the US economy, which he added did not appear to be in recession.

“The Fed’s job is very straightforward, maximise employment, stabilise prices and maintain financial stability. That’s what we’re going to do,” Goolsbee said. If there was any “deterioration”, he added, “we’re going to fix it”.

Mary Daly, president of the San Francisco Fed, told an event in Hawaii that officials “will do what it takes” to meet the central bank’s price stability and employment goals, but she said: “We look at the totality of the information before we act.”

The market turmoil worsened after weaker-than-expected labour market data on Friday led to global fears of a sharp slowdown in the US economy.

Goolsbee said the Fed did not respond to one set of economic figures but kept its options open in terms of monetary policy action. 

“Should we reduce restrictiveness? I’m not going to bind our hands of what should happen going forward because we’re still going to get more information. But if we are not overheating, we should not be tightening or restrictive in real terms,” he said.

Last week, the Fed kept its main interest rate between 5.25 per cent and 5.5 per cent, but signalled that its first cut of the cycle could come as early as September.

The combination of the slowing jobs market and the negative market reaction may lead the central bank to act more aggressively and lock in expectations of an interest rate cut in September and possibly a two-notch 50 basis points reduction, with more interest rate cuts than previously expected through the end of the year.

Jay Powell, the Fed chair, is due to speak this month at the annual Jackson Hole conference.

“The FOMC [Federal Open Market Committee] needs to get back to a ‘neutral’ stance of policy quickly or else it risks a vicious circle of labour market weakness leading to sluggish spending, leading to further labour market weakness,” Jay Bryson, chief economist at Wells Fargo, wrote in a note on Monday.

Bryson predicted a 50 basis point interest rate cut in September, and another 50bp cut in November.

The Fed has in the past considered emergency rate cuts, often in co-ordination with other central banks, in times of very severe financial distress or rapid economic decline — such as at the height of the pandemic in early 2020. But most observers on Monday considered that unlikely.

“The narrative that the Fed is going to respond with an emergency policy move to what we’ve seen so far is just, like, a Twitter thing,” Steven Kelly of the Yale University Program on Financial Stability wrote on X. “We are very far from an inter-meeting rate cut, let alone any lending/market intervention,” he added.

Goolsbee said he did not believe the US had been plunged into recession. “Jobs numbers came in weaker than expected, but [are] not looking yet like recession,” he said.

Daly echoed that the FOMC was open to cutting rates at its next meetings, but “if we reacted on one data point, we would almost always be wrong”.

She noted that July’s report featured high numbers of temporary lay-offs and foreign born workers re-entering or entering the workforce for the first time.

“Underneath the hood of the labour report there’s a little more room for confidence, confidence that we are slowing but not falling off a cliff,” Daly said.

Their comments were reinforced by the Institute for Supply Management’s index of services sector activity which was released on Monday and jumped more than expected compared to July.

“The latest ISM services report will ease fears of a sharp economic slowdown and that rapid Fed easing is needed to save the soft landing,” said Oren Klachkin, financial market economist at Nationwide.

Stephen Brown, deputy chief North American economist at consultancy Capital Economics, said that a “soft landing is still the most likely outcome for the economy”.

But he added: “Nonetheless, the risk of a hard landing has increased, while the disorderly market reaction — if sustained — could prompt the Fed to loosen policy faster than we forecast.”