Market analysis believes that if the Federal Reserve chooses to cut interest rates by 50 basis points next week, it will solidify expectations of a US economic recession and inevitably cause market panic. On Wall Street, this view has been opposed by some analysts and economists.

Michael Yoshikami, CEO of Destination Wealth Management, believes that a 50 basis point interest rate cut would indicate that the Fed is ready to take action and would not signal an economic downturn.

Yoshikami said in an interview with CNBC on Monday:

I wouldn't be surprised if the Fed raises interest rates by 50 basis points. On the one hand, this would be seen as a very positive signal that the Fed is taking necessary steps to support job growth. I believe the Fed is prepared to handle this situation.

Coincidentally, Nobel laureate in economics Joseph Stiglitz said on Friday before the non-farm payroll report was released that the Fed should cut interest rates by 50 basis points at its September meeting, as he believed the Fed's previous policy tightening was "excessive and too fast". He also believes that a significant interest rate cut would help address inflation and employment issues.

The August non-farm payroll report presented a mixed picture, with a slight decrease in the unemployment rate but unexpectedly weak job growth, reinforcing the view of a deteriorating labor market. The probability of a 50 basis point interest rate cut briefly rose to over 40%.

As of now, according to the CME FedWatch tool, traders currently expect a 75% probability of a 25 basis point interest rate cut in September, while the probability of a 50 basis point cut has fallen to 25%.

Is the panic of recession exaggerated?

Yoshikami acknowledges that a significant rate cut may exacerbate concerns about a hard landing, but he insists that this view is exaggerated, pointing out that unemployment and interest rates are still historically low and corporate profits have been strong.

He said that last week the s&p 500 index had its worst week since March 2023, mainly due to large-scale profit-taking by investors. In August, despite the initial volatility, all major indices rose, while September is traditionally a weaker trading period.

ABP Invest founder and chief investment officer Thanos Papasavvas also acknowledges growing concerns about an economic recession. Earlier, the research firm raised the likelihood of a US economic recession from a 'mild' 25% in June to a 'relatively manageable' 30%.

However, Papasavvas told CNBC on Monday that manufacturing and unemployment rates still have resilience and will provide support for the US economy.

We are not particularly concerned about the US economy entering a recession.

Is a significant rate cut 'very dangerous'?

Compared to the analysts mentioned above, Forvis Mazars chief economist George Lagarias is more cautious and pessimistic, stating that a 50 basis point rate cut could scare the financial markets.

In the mixed situation of the U.S. economy, George Lagarias firmly stands in the camp calling for a 25 basis points interest rate cut, as he believes that the current economic conditions do not warrant a 50 basis points interest rate cut. He stated:

If the Federal Reserve cuts interest rates by 50 basis points, it may send a wrong signal to the market and the economy, leading market participants to mistakenly believe that the economic situation is very severe, thereby causing panic. This may be a self-fulfilling prophecy that leads to an actual recession.

Previously, Jefferies Financial's Chief Financial Economist in Europe Mohit Kumar also stated that the Federal Reserve "absolutely does not need" to cut interest rates by 50 basis points in September.

Editor/ping