No case for more jumbo rate cuts by the Fed, strategists say

There is no case for more 50-basis-point rate cuts by the Federal Reserve, veteran market strategists told CNBC, saying the latest U.S. jobs data implies the central bank might have acted in haste.

David Roche, founder and strategist at Quantum Strategy, described the Fed’s decision last month to lower its key overnight borrowing rate by a half percentage point as a kneejerk move.

Nonfarm payrolls data out last Friday showed employers added 254,000 jobs in September, well beyond economists’ expected 150,000. The unemployment rate, meanwhile, fell to 4.1%, down 0.1 percentage point.

Roche said the figures made the Fed’s “jumbo interest rate cut look silly, populist and panicky.”  

“The fault is being overly data dependent and without a strategic view,” he said in emailed comments Friday, noting that, as a consequence, there should be “no more Jumbo cuts … unless something real bad happens,” such as the Middle East conflict escalating to the point where Israel bombs Iranian nuclear testing sites. 

Speaking to CNBC Monday, Roche said the Fed’s move could prove harmful as it gives a false impression of the U.S. economy.

“No. 1 is that [it gives the impression that] the economy is more fragile than it is … and the economy is fine, thank you very much, and doesn’t need jumbo rate cuts,” he told CNBC’s “Squawk Box Europe.”

“The second thing it does is to give you the impression that the Fed will cut rates successively to a level which is much lower than it actually will achieve. Fed rates will not go below 4% or 3.5%, and the reason for that is the economy is so robust that firms earn enough money without needing a lower interest rate.”

By “cutting hard in the beginning,” Roche said, the central bank created the impression that there will be “more jumbo cuts of 50%,” which could cause “market instability when the market wakes up to that fact.”

The Fed at the time defended the large cut, saying there were signs that inflation was moderating and the labor market was weakening.

Trader expectations of a large interest rate cut in November have fallen off a cliff following last week’s data.

There are now 87.4% odds that the Fed’s target range for the federal funds rate, its key rate, will be lowered by a quarter percentage point to 4.5% to 4.75% in November, according to the CME Group’s FedWatch tool.

Odds of the rate remaining at 4.75% to 5% are 12.6%, according to the tool, whereas odds of a 50-basis-point cut are at 0%. One week ago, however, odds of a jumbo cut were at 34.7%.

When the Federal Open Market Committee chose last month to lower its federal funds rate by 50 basis points it was — barring emergency rate reductions during the Covid pandemic — the first time it had done so since the global financial crisis in 2008. The FOMC also indicated through its “dot plot” the equivalent of 50 more basis points of cuts by the end of the year, with two meetings left on Nov. 6-7 and Dec.17-18.

Bob Parker, senior advisor at the International Capital Markets Association, agreed with Roche that the “case for the Fed to cut aggressively just isn’t there at all.”

“We come back to two fundamental point. Firstly, that the probability of the American economy going into recession, at least in the fourth quarter of this year, and probably in the first quarter of next year, is close to zero. And headline and core inflation will stay above the Fed target of 2%, so the case for aggressive rate cuts [is not there],” he said.

“Yes there is a case for modest rate cuts, there is a case for 25 to 50 basis point cuts by January next year, but a case for 50 basis point cut at the next meeting just does not exist,” Parker said.

Global markets rallied Friday after the U.S. jobs data allayed fears of an economic slowdown, although analysts cautioned that the upcoming U.S. presidential election and unrest in the Middle East could keep market volatility elevated in the coming weeks.

Dave Pierce, director of strategic initiatives at GPS Capital Markets, said that while there was “big movement” in the market on Friday, when the Dow Jones Industrial Average jumped 300 points, recent downward revisions to U.S. nonfarm payroll data should signal a note of caution.

“It feels like the numbers have not been as accurate as they could have been,” he told CNBC Monday.

“So even though I think that [the jobs] number is definitely important, definitely significant, and it’s really going to impact what the next Fed meeting is going to look like — a 50 point rate cut is most likely 100% off the books — and we are seeing some improvement in the economy, we have also been seeing some slowdown.”

Pierce said residual negative sentiment surrounding the U.S. economy was centered on inflation, which stood at 2.5% in August, and how this affected Americans day-to-day.

“The economy is doing great and nobody is saying that the U.S. economy is not, but there are still a lot of people struggling and especially with inflation and how much [the price of] things have gone up in recent years,” he said.

“So it’s things like that that I think are causing the underlying sentiment in the marketplace that things are not as good as they they could be. Because even though people have got jobs and they’ve got employment, they’re still struggling to make things [work] day-to-day.”

— CNBC’s Jeff Cox and John Melloy contributed reporting to this story.