A financial author and stock market analyst now says the Federal Reserve will be forced to initiate an emergency rate cut before its next meeting in September to stem the sell-off in stocks of recent days.
Robert Prechter, founder and president of Elliott Wave International, joined Neil Cavuto on Fox Business Monday night and said the Fed missed a huge opportunity at its meeting last week to get ahead of the market calamity that continues to unfold.
“I think there will be a surprise rate cut before the September meeting because I think rates have started to fall faster,” he said.
The last time the Federal Reserve made emergency rate cuts was during the COVID pandemic, and many experts believe it won’t happen again because it would be a sign that the US economy is in dire shape, possibly creating even more fears in the market.
In January, Prechter warned that it was dangerous to have too much optimism in the market. On Monday, he said that optimism is now “entrenched” and that the world is witnessing “the most overextended market in history.”
Robert Prechter, pictured, believes the Fed will make an unprecedented emergency rate cut to deal with market turmoil
Following Friday’s jobs report, which showed unemployment in July rose to the highest level since October 2021, markets around the world went into free fall amid fears that the US economy is stagnating.
Monday’s continued slide was led by Tokyo’s benchmark Nikkei 225 index, the world’s third-largest, which plunged 12 percent this morning, the biggest single-day drop in nearly four decades.
The S&P 500 fell 3 percent, its worst day in nearly two years. The Dow Jones Industrial Average slumped 1,033 points, or 2.6 percent, while the Nasdaq Composite dropped 3.4 percent.
In total, Bloomberg estimates that $6.4 trillion has been wiped off the value of global stock markets in the past three weeks.
Much of this could have been avoided if the Fed had decided to cut rates at last week’s meeting, according to Prechter.
“The Federal Reserve had a wonderful opportunity last Wednesday to cut its federal funds rate by a quarter point, but it didn’t take advantage of it,” he said. “I think that was a huge mistake.”
US job growth fell far short of expectations in July and the unemployment rate hit its highest level in nearly three years
U.S. Federal Reserve Chairman Jerome Powell kept benchmark borrowing costs unchanged at a 23-year high at his latest meeting
Now, economists at Goldman Sachs have raised the probability of the US falling into a recession over the next year from 15 percent to 25 percent, while analysts at JP Morgan put the odds at 50 percent.
The Federal Reserve has been raising rates since March 2022 in an attempt to contain inflation, but one prominent economist believes the agency is suffering from tunnel vision.
Allianz chief economic adviser Mohamed El-Erian blamed the Fed for the current state of the market, saying the rate hikes were hitting the economy hard.
“I’m really worried that we could lose American economic exceptionalism because of a policy mistake,” he said. Bloomberg Television.
Even if the Fed waits until September to cut rates, most industry observers believe a rate cut will indeed happen.
JPMorgan analysts wrote in a note that because “the Fed appears to be materially behind schedule, we expect a 50 (basis point) cut at the September meeting, followed by another 50 (basis point) cut in November.”
Investors now also believe other major central banks will follow the Fed’s lead and ease rates more aggressively, with the European Central Bank seen cutting rates by 67 basis points by Christmas.
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