Federal Reserve officials say "the U.S. economy is not in recession" to reassure the market

Author: James Politi, Martin Muir

Source: FT Chinese

Two senior officials from the Federal Reserve attempted to calm market turmoil on Monday, as a global stock sell-off raised expectations that the Fed would have to cut interest rates more aggressively.

Chicago Fed President Austan Goolsbee told CNBC that the Fed would take steps to "repair" any deterioration in the U.S. economy. He added that the U.S. economy does not appear to be in recession.

"The Fed's job is very clear: to maximize employment, stabilize prices, and maintain financial stability. That’s what we are here to do," Goolsbee said. If there is any "deterioration," he added, "we will fix it."

San Francisco Fed President Mary Daly stated at an event in Hawaii that officials would do "everything possible" to achieve the central bank's price stability and employment goals, but she noted, "We will consider all information before taking action."

Weaker-than-expected labor market data released last Friday raised global concerns about a sharp slowdown in the U.S. economy, which further exacerbated market turmoil.

Goolsbee indicated that the Fed is not responding to a set of economic data but is keeping its options open regarding monetary policy actions.

"Should we reduce restrictions? I won’t tie my hands on what should happen going forward, as we will still receive more information. But if we are not overheating, we should not actually tighten or restrict," he said.

Last week, the Fed kept its main interest rate between 5.25% and 5.5%, but indicated that the first rate cut of this cycle could occur as early as September.

A slowdown in the labor market and negative market reactions could lead the central bank to take more aggressive actions, locking in expectations for a rate cut in September and possibly a two-stage cut of 50 basis points, with the total cut by the end of the year exceeding previous expectations.

Fed Chair Jay Powell is scheduled to speak at the Jackson Hole annual meeting this month.

"The Federal Open Market Committee (FOMC) needs to quickly return to a 'neutral' policy stance, or it will face a vicious cycle of weak labor market leading to weak consumption, which further weakens the labor market," Wells Fargo Chief Economist Jay Bryson wrote in a report on Monday.

Bryson predicts a 50 basis point rate cut in September, followed by another 50 basis point cut in November.

In the event of a severe financial crisis or a rapid economic downturn—such as during the peak of the pandemic in early 2020—the Fed has previously considered emergency rate cuts, usually in coordination with other central banks. However, most observers on Monday believed this possibility was unlikely.

"The notion that the Fed would make an emergency policy adjustment based on what has happened so far is just a Twitter-like thing," Steven Kelly of Yale's Financial Stability Project wrote on X. "We are far from a rate cut during the intermeeting period, let alone any lending/market intervention," he added.

Goolsbee stated that he does not believe the U.S. is in recession. "The employment data is weaker than expected, but it doesn’t look like a recession yet," he said.

Daly responded that the FOMC is open to a rate cut at the next meeting, but "if we react to just one data point, we are almost always wrong."

She pointed out that the July report showed a significant number of temporary layoffs and foreign-born workers re-entering or entering the labor market for the first time.

"Behind the labor report, we have more confidence that we are slowing down, but not falling off a cliff," Daly said.

The U.S. Services Purchasing Managers' Index released on Monday jumped beyond expectations from July, further supporting their view.

"The latest ISM services report will alleviate concerns about a sharp economic slowdown and worries that the Fed needs to quickly ease policy to save a soft landing," said Oren Klachkin, an economist at Nationwide Financial Markets.

Stephen Brown, Deputy Chief North America Economist at Capital Economics, stated, "A soft landing remains the most likely outcome for the U.S. economy."

However, he added, "Nevertheless, the risk of a hard landing has increased, and a disorderly market reaction—if it continues—could prompt the Fed to ease policy more quickly than we expect."