Markets are counting on the Fed to head off recession with sizable interest

In the market’s eyes, the Federal Reserve finds itself either poised to head off a recession or doomed to repeat the mistakes of its recent past — when it was too late seeing a coming storm.

How Chair Jerome Powell and his cohorts at the central bank react likely will go a long way in determining how investors negotiate such a turbulent climate. Wall Street has been on a wild ride the past several days, with a relief rally Tuesday ameliorating some of the damage since recession fears intensified last week.

“In sum, no recession today, but one is increasingly inevitable by year-end if the Fed fails to act,” Steven Blitz, chief U.S. economist at TS Lombard, said in a note to clients. “But they will, beginning with a [half percentage point] cut in September telegraphed in late August.”

Blitz’s comments represent the widespread sentiment on Wall Street — little feeling that a recession is an inevitability unless, of course, the Fed fails to act. Then the probability ramps up.

Disappointing economic data recently generated worries that the Fed missed an opportunity at its meeting last week to, if not cut rates outright, send a clearer signal that easing is on the way. It helped conjure up memories of the not-too-distant past when Fed officials dismissed the 2021 inflation surge as “transitory” and were pressed into what ultimately was a series of harsh rate hikes.

Now, with a weak jobs report from July in hand and worries intensifying over a downturn, the investing community wants the Fed to take strong action before it misses the chance.

Traders are pricing in a strong likelihood of that half-point September cut, followed by aggressive easing that could lop 2.25 percentage points off the Fed’s short-term borrowing rate by the end of next year, as judged by 30-day fed funds futures contracts. The Fed currently targets its key rate between 5.25%-5.5%.

“The unfortunate reality is that a range of data confirm what the rise in the unemployment rate is now prominently signaling — the US economy is at best at risk of falling into a recession and at worst already has,” Citigroup economist Andrew Hollenhorst wrote. “Data over the next month is likely to confirm the continued slowdown, keeping a [half-point] cut in September likely and a potential intermeeting cut on the table.”