Wall Street accuses the Fed of missing the best time to cut interest rates and boldly predicts the future trend of the US economy

Overall, Bloomberg estimates that $6.4 trillion has been wiped out of global stock markets in the past three weeks.

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According to economist Prechter, many of the current problems could have been avoided if the Federal Reserve had decided to cut interest rates at its meeting last week. He said: "The Fed had a great opportunity to cut the federal funds rate by a quarter percentage point last Wednesday, but they didn't do it. I think this is a big mistake."

Now, Goldman Sachs economists have raised the probability of the United States falling into a recession in the next year from 15% to 25%, while JPMorgan analysts have estimated the probability at 50%. The Federal Reserve has been raising interest rates since March 2022 to curb inflation, but one top economist believes that the agency is suffering from "tunnel vision."

Mohamed El-Erian, chief economic adviser to Allianz, blamed the Fed for the current state of the market and said that the rate hikes have dealt a severe blow to the economy. “I’m really concerned that we could lose the specialness of the U.S. economy because of policy mistakes,” he said in an interview with Bloomberg TV. Even if the Fed waits until September to cut rates, most industry observers still believe a rate cut is indeed on the way.

Analysts at JPMorgan wrote in a memo that because “the Fed has clearly lagged behind the economy, we expect a 50 basis point cut at the September meeting, followed by another 50 basis point cut in November.” Investors are also now confident that other major central banks will follow the Fed’s lead and ease rates more aggressively, with the European Central Bank expected to cut 67 basis points by Christmas.

Ashok Bhatia, co-chief investment officer of fixed income at Neuberger Berman, said the Fed’s terminal rate pricing of 2.9% is appropriate at the moment. “The market’s expectation of a terminal rate below 3% would be equivalent to a real rate of about 1% (assuming the Fed can and will get inflation back to about 2%), which in our view is essentially the neutral rate.” While the economy may eventually need easing or lower real rates, that will be a long-term question. ”

El-Erian, a well-known economist, said the Fed should refuse to appease the market. Five things have combined to undermine a stock market that appears to have solid fundamentals: concerns that slowing economic growth will seriously undermine "American exceptionalism"; concerns that the Fed's decision not to cut interest rates last week will exacerbate the feared recession; crowded investment positions are caught off guard by sudden changes in the economic and policy narrative; the possibility of escalating conflicts in the Middle East, which in turn will cause oil prices to soar and complicate the operation of international supply chains; and domestic political developments in the United States that may lead to chaos before the election. In any of these cases, the Fed's intervention would constitute an overreaction. The Fed should let the market's overreactions resolve themselves, after which it needs to make a credible attempt to regain control of the policy narrative. At the same time, it must also make it clearer The New York Fed published an article on Tuesday (August 6) stating that the Fed's balance sheet is a "key tool" used to support the FOMC's monetary policy goals and "support financial stability in rare circumstances." The Fed sets its monetary policy stance primarily by adjusting the target range for the federal funds rate, but the FOMC has previously helped ease overall financial conditions by purchasing U.S. Treasury bonds and agency mortgage-backed securities (MBS), especially when interest rates were around zero. Such purchases have also been used to address market dysfunctions, such as when the coronavirus pandemic disrupted financial markets in March 2020. Christian of the New York Fed The FOMC also directed the Fed to reduce the size of its balance sheet and its holdings to "levels consistent with the efficient and effective implementation of monetary policy in a regime of ample reserves," Cabanilla, Eric LeSueur and Josh Younger wrote.

The dollar has recovered somewhat after Monday's plunge, but the recovery may be short-lived amid expectations of aggressive U.S. rate cuts, ING said. The dollar's interest rate advantage has been eroded, and "there is room for procyclical currencies to recalibrate higher against the dollar against a backdrop of more favorable interest rate differentials," ING analyst Francesco Pesole said in a note. "Weaker-than-expected U.S. nonfarm payrolls data on Friday stoked concerns about a potential recession, prompting markets to price in further rate cuts from the Federal Reserve and sending the dollar to a near seven-month low on Monday.

The Fed's easing policy will lower the bar for Asian central banks to cut rates, but not all will follow the Fed's lead, economists at Nomura Securities said in a report. They said the Fed's easing and lower U.S. Treasury yields could lead to earlier easing by Bank Indonesia and the Philippine central bank. Nomura currently expects the Philippine central bank to cut rates in August instead of October, and Bank Indonesia to cut rates in September instead of February next year. However, the Bank of Korea may only start cutting rates from October as its foreign exchange concerns have been replaced by concerns about rising housing prices. Nomura expects the Reserve Bank of India to cut rates in October ahead of schedule. The bank expects Thailand and Malaysia to keep their policy rates unchanged in 2024-2025, but does not rule out the possibility of a rate cut by the Bank of Thailand in the fourth quarter.