There is significant debate among Federal Reserve officials as to whether or not they will cut interest rates at the next meeting this month.
Some officials feel the economy is strong and does not warrant a rate cut, others believe it makes sense to monitor the current situations, and some feel that now is the time to cut rates decisively.
Globally there is a strong trend toward zero and negative nominal rates on sovereign debt, which has been proliferating across the euro zone to Japan and beyond. The Fed has fought the trend even though many of its officials have indicated they anticipate that the next economic downturn will see a return to near-zero rates, which former Chairman Alan Greenspan has speculated as well.
“If the Fed only goes 25, that’s a risk-off event for equities. The Fed needs to think more holistically and look more where global rates are,” said Joe LaVorgna, Natixis chief economist , who advocates a 75 basis point cut that the Sept. 17-18 Federal Open Market Committee meeting, though he knows there is no chance of it happening.
“They have to go back to data dependence and mean it,” he added. “They have to go more. That’s why I’m arguing for 75. That’s what would un-invert the curve.”
Some economic data such as Markit PMI and Institute for Supply Manufacturing are suggesting the market may experience some contraction. However, the ISM non-manufacturing index released Thursday showed the stagnation has not affected the services industry yet, which generates more activity in the U.S. economy and is the primary driver of job growth.
“On one hand, while the manufacturing and manufacturing-linked data is moderating and providing an ample amount of ammunition to stimulate, the employment and the price stability and inflation-based data doesn’t,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “Inflation actually may be bouncing back a little bit from what had been a lot of deflationary fears earlier in the year.”