The Federal Reserve could deliver a massive 50 basis point rate cut next week without panicking the markets as opinions on the central bank’s upcoming meeting remain widely divided.
Destination Wealth Management CEO Michael Yoshikami said on Monday that further rate cuts would show the central bank is ready to act but would not signal deeper concerns about a broader economic downturn.
"I wouldn't be surprised if rates go all the way up to 50 basis points," Yoshikami told CNBC.
On the one hand, it would be seen as a very positive sign that the Fed is doing what is necessary to support job growth,” he continued. “I think the Fed is well positioned to deal with that at this point.”
His comments echoed similar comments made last Friday by Nobel Prize-winning economist Joseph Stiglitz, who said the Fed should cut interest rates by half a percentage point at its next meeting and argued that the Fed's previous policy tightening had gone "too far, too fast."
Policymakers are widely expected to cut interest rates at their Sept. 17-18 meeting, but the extent of the cut is unclear. Disappointing jobs data on Friday stoked concerns about a slowing labor market and briefly pushed market expectations for a deeper rate cut, but then backed off.
Traders are currently pricing in about a 75% chance of a 25 basis point rate cut in September, according to the CME Group's FedWatch tool, while 25% of traders are expecting a 50 basis point cut.
Yoshigami acknowledged that a deeper rate cut could stoke fears of an impending recession, but he insisted such views were overblown, noting that unemployment and interest rates remain historically low and corporate earnings have been strong.
He said the recent market sell-off, which led to the S&P 500’s worst week since March 2023, was based on “huge profits” from last month. In August, all major indexes rose despite a volatile start, while September is traditionally a period of weaker trading.
Thanos Papasavvas, founder and chief investment officer at ABP Invest, also acknowledged that there has been “heightened concern” about a potential recession.
The research firm recently revised its odds of a U.S. recession to a “relatively manageable” 30% from a “mild” 25% in June. However, Papasavvas said the fundamental components of the economy — manufacturing and unemployment — “remain resilient.”
“We are not particularly concerned about a U.S. recession,” Papasavvas told CNBC on Monday.
Those views contrast with those of other market watchers, such as economist George Lagarias, who told CNBC last week that a big rate cut could be “very dangerous.”
“I don’t think a 50 basis point rate cut is necessary,” Forvis Mazars chief economist said in an interview with CNBC.
"A 50 basis point rate cut could send the wrong message to the markets and the economy. It could send a message of urgency and, you know, it could be a self-fulfilling prophecy," Lagarías added.
