Markets expect extraordinary rate cut from Fed

Rising recession concerns in the US, expectations that the Bank of Japan (BoJ), which raised interest rates by 25 basis points last week, may have entered a rate hike cycle, and rising tensions in the Middle East triggered a Black Monday in global markets.

Following these developments, an expectation emerged that the US Federal Reserve (Fed) would hold an extraordinary meeting within a week.

In the US, traders are pricing in a 60 percent probability that the Fed will hold an extraordinary meeting within a week and raise interest rates by 25 basis points.

Bloomberg emphasized that it would be a real “sign of concern” if the Fed were to meet and cut interest rates without waiting until September, given that it had announced its decision to keep interest rates steady last week.

SPREAD TO OTHER REGIONS

Previous concerns about the risk of high inflation quickly gave way to speculation that growth would stall.

Global markets have been hit hard today by concerns about a recession unless the Fed starts cutting interest rates from their highest levels in more than two decades.

Expectations of aggressive easing have spread to other regions, with German bonds falling to their lowest levels in seven months on expectations that the European Central Bank will follow the Fed in cutting interest rates.

WHEN HAS IT HAPPENED BEFORE?

The Fed has previously held extraordinary meetings during crisis periods and made interest rate cut decisions.

The Fed lowered its policy rate to the range of 0 – 0.25 percent in an extraordinary meeting in March 2020 due to the negative effects of the coronavirus pandemic on the economy.

In 2008, the Fed cut interest rates by 50 basis points after Lehman Brothers' bankruptcy announcement shook financial markets.

The Fed also made extraordinary interest rate cuts in 1994, 1998, 2001 and 2007.