Will it or won't it? The debate around off-cycle Fed rate cut intensifies

“If they (Fed) are going to be as slow on the way down as they were on the way up, which by the way was the first policy error in 50 years, then we’re not in for a good time with this economy," the professor emeritus of finance at University of Pennsylvania’s Wharton School said in the interview.

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Chicago Fed President Austan Goolsbee stated that the Fed will address worsening economic conditions but does not believe the US is currently in a recession. He emphasized that the Fed’s mandate is to monitor the real economy rather than react to stock market fluctuations.

Emergency rate cuts by the Fed are rare, with the last off-cycle cut occurring at the pandemic’s onset in March 2020, when rates were slashed by 0.5 percent and then by 1 percent less than two weeks later. The previous emergency cut was in 2008 during the Great Recession, shortly after Lehman Brothers' collapse.

Since inflation remains well above the 2 percent target, an emergency rate cut could push it even higher. Such a move might also lead to markets expecting more aggressive actions from the Fed, potentially sending equities into a frenzy if those expectations are not met.

In the 1970s, then-Fed Chair Arthur Burns' rapid easing of monetary policy led to a resurgence of inflation. This historical precedent suggests that the Fed is likely to avoid an off-cycle rate cut to prevent repeating past mistakes.

An emergency cut can worsen yen carry trade unwinding by making the US assets less attractive, increasing yen demand as investors repay yen loans, and escalating market volatility.

Guy Adami, co-founder of Risk Reversal, argues that an off-cycle cut is unlikely, noting that such cuts are not a cure-all. "A rate cut actually makes the yen carry trade worse," he said.

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An emergency rate cut from the Federal Reserve before the next FOMC meeting is unlikely, according to UBP's Global Head of FX Strategy Peter Kinsella. Speaking to Bloomberg, he said that it would send panic signals through the markets and that the Fed just signaling they will start aggressively cutting rates should be enough.

Helios Capital founder Samir Arora also believes that an emergency rate cut is unlikely. In response to an X post asking whether the Fed will go for an off-cycle rate cut, Arora wrote, "No Chance".

There are risks of the US Federal Reserve not implementing an off-cycle rate cut amid current economic weakness.

With the US economy showing signs of distress, evidenced by poor manufacturing PMI, declining new orders, rising unemployment benefit claims, minimal new job creation, and an unemployment rate climbing to 4.3 percent, questions are emerging about the Fed's ability to achieve a "soft landing."

The economic indicators have made some believe that without an emergency rate cut, the Fed might struggle to support the economy effectively, potentially exacerbating the downturn.

This inaction could further deteriorate economic conditions, casting doubt on the Fed's narrative and increasing pressure on both markets and policymakers.