Why we might see interest rates slashed faster than we thought
Across the pond, the stock markets are in free fall – and commentators are predicting that the Fed may need to slash rates by 50 basis points in September, and maybe again the month after.
CNBC business presenter Karen Tso has been discussing the severe stock market volatility on Sky TV, emphasising the significant impact underlying factors could have on global interest rates.
Describing the recent stock market declines as a “very big market event playing out,” Tso highlighted that fears of a US recession are the primary driver. Just weeks ago, there was optimism about the resilience of the US economy, but the mood has shifted dramatically.
Earlier today, US stocks plummeted as part of a global market sell-off centred around recession fears. The Dow Jones Industrial Average dropped 926 points (2.3%), the Nasdaq Composite lost 3.9%, and the S&P 500 slid 3%. Earlier, the Dow had fallen as much as 1,200 points before slightly recovering due to a better-than-expected services PMI reading for July. Japan’s Nikkei 225 also plunged 12%, marking its worst day since the 1987 Black Monday crash on Wall Street.
The disappointing July jobs report, which saw only 114,000 jobs created against Wall Street’s forecast of 175,000, sparked these recession fears. Analysts at JPMorgan now estimate a 50% probability of a US recession, predicting that the US Federal Reserve might cut interest rates by 50 basis points (bp) in both September and November. This is a significant shift for the Fed, which had maintained the highest rates in two decades.
Here in the UK, the Bank of England recently made its first 25bp cut, warning that further rate reductions would be gradual. However, Tso believes that the current developments could alter the approach of central banks worldwide.
She explained to Sky News: “The consequences are huge because it’s not just the Fed we’re talking about here. If this is the case and we’re talking about a change to monetary policy in the US, it could mean other central banks from the ECB to the Bank of England to beyond could be talking about more aggressive rate cuts.”
Janet Mui, head of market analysis at investment management firm RBC Brewin, agrees, and said that the BoE “will certainly feel that pressure to cut interest rates further. If you have a floating rate mortgage, you could potentially see more relief down the line. And if you’re going to remortgage or have a new mortgage, I think you’re very likely to be getting a much lower rate,” she told the broadcaster.
The sell-off has heavily impacted tech stocks. Nvidia dropped over 5%, Apple fell nearly 4.6% after Warren Buffett’s Berkshire Hathaway halved its stake in the company, Tesla plummeted 10%, and Broadcom and Super Micro Computer declined by 7% and 12%, respectively.
In addition to the stock market turmoil, US Treasury yields fell as investors moved towards the safety of bonds, with the benchmark 10-year note yielding 3.7%. Bitcoin also saw a sharp drop from nearly $62,000 on Friday to around $52,000 on Monday. Europe’s Stoxx 600 fell by 2.5%, and the CBOE Volatility Index reached its highest level since the early days of the pandemic in 2020, trading at 46.
The Bank of Japan’s recent interest rate hike has also played a role in the global market decline, affecting the yen’s value against the dollar and impacting the yen “carry trade” practice.
Chicago Fed president Austan Goolsbee indicated on CNBC’s “Squawk Box” that current interest rates might be too “restrictive”. He assured that if economic conditions worsen, the central bank would “fix it”.
