No case for more jumbo rate cuts by the Fed, strategists say

There is no case for more 50-basis-point rate cuts by the Federal Reserve, veteran market strategists told CNBC, saying the latest U.S. jobs data implies the central bank might have acted in haste.

David Roche, founder and strategist at Quantum Strategy, described the Fed’s decision last month to lower its key overnight borrowing rate by a half percentage point as a kneejerk move.

Nonfarm payrolls data out last Friday showed employers added 254,000 jobs in September, well beyond economists’ expected 150,000. The unemployment rate, meanwhile, fell to 4.1%, down 0.1 percentage point.

Roche said the figures made the Fed’s “jumbo interest rate cut look silly, populist and panicky.”  

“The fault is being overly data dependent and without a strategic view,” he said in emailed comments Friday, noting that, as a consequence, there should be “no more Jumbo cuts … unless something real bad happens,” such as the Middle East conflict escalating to the point where Israel bombs Iranian nuclear testing sites. 

Speaking to CNBC Monday, Roche said the Fed’s move could prove harmful as it gives a false impression of the U.S. economy.

“No. 1 is that [it gives the impression that] the economy is more fragile than it is … and the economy is fine, thank you very much, and doesn’t need jumbo rate cuts,” he told CNBC’s “Squawk Box Europe.”

“The second thing it does is to give you the impression that the Fed will cut rates successively to a level which is much lower than it actually will achieve. Fed rates will not go below 4% or 3.5%, and the reason for that is the economy is so robust that firms earn enough money without needing a lower interest rate.”

By “cutting hard in the beginning,” Roche said, the central bank created the impression that there will be “more jumbo cuts of 50%,” which could cause “market instability when the market wakes up to that fact.”

The Fed at the time defended the large cut, saying there were signs that inflation was moderating and the labor market was weakening.

Trader expectations of a large interest rate cut in November have fallen off a cliff following last week’s data.

There are now 87.4% odds that the Fed’s target range for the federal funds rate, its key rate, will be lowered by a quarter percentage point to 4.5% to 4.75% in November, according to the CME Group’s FedWatch tool.

Odds of the rate remaining at 4.75% to 5% are 12.6%, according to the tool, whereas odds of a 50-basis-point cut are at 0%. One week ago, however, odds of a jumbo cut were at 34.7%.

When the Federal Open Market Committee chose last month to lower its federal funds rate by 50 basis points it was — barring emergency rate reductions during the Covid pandemic — the first time it had done so since the global financial crisis in 2008. The FOMC also indicated through its “dot plot” the equivalent…