In a recent interview, market strategist David Roche, the founder of Quantum Strategy, shared his concerns regarding the Federal Reserve’s recent decision to lower the key overnight borrowing rate by half a percentage point. Roche suggested that this move might have been premature, arguing that the Fed lacks sufficient justification for further cuts, especially given the latest employment data, which he interprets as a sign of potential overreaction.
Roche criticized the Fed’s decision, describing it as a reflexive response driven by panic rather than a well-thought-out strategy. “The most recent non-farm payroll report showed that employers added 254,000 jobs in September, which is significantly higher than the economists’ expectation of 150,000. Additionally, the unemployment rate dropped by 0.1 percentage points to 4.1%,” he highlighted.
He pointed out that this robust data complicates the rationale behind the Fed’s substantial rate cut. “It seems illogical to make drastic cuts when the economy is performing well. The real concern is that the Fed is relying too heavily on data without taking a strategic approach. We should refrain from aggressive cuts unless absolutely necessary, such as in the event of a major escalation in the Middle East or an attack on Iranian nuclear facilities by Israel.”
Roche also warned that the Fed’s recent actions could misinterpret the current state of the U.S. economy. “Firstly, it suggests that the economy is weaker than it truly is. The economy is robust and does not necessitate severe rate cuts. Secondly, it could foster a belief that the Fed will continue to reduce rates to levels well below what is appropriate. Given the economy’s strength, I don’t foresee interest rates falling below 4% or 3.5%. Businesses are earning sufficiently without needing lower rates.”
He expressed concerns that the Fed’s significant initial cut might lead to expectations of another 50 basis point reduction, which could result in market instability when the reality of the economic situation becomes clear.
While the Federal Reserve has justified its 50-basis-point cut by pointing to signs of easing inflation and a weakening labor market, trader expectations for a substantial rate cut in November have significantly diminished following the recent employment data release.
According to the CME Group’s FedWatch tool, there’s now an 87.4% likelihood that the federal funds rate will be lowered by 0.25 percentage points to a target range of 4.5% to 4.75% in November, with only a 12.6% chance of maintaining rates at 4.75% to 5%. The probability of a 50-basis-point cut currently stands at zero, down from 34.7% just a week ago.
Last month, the Federal Open Market Committee (FOMC) decided to cut the federal funds rate by 50 basis points, marking the first such reduction since the global financial crisis in 2008, aside from emergency cuts during the COVID-19 pandemic. The FOMC’s dot plot indicates another potential 50-basis-point cut by the end of the year, with key meetings scheduled for November 6-7 and December 17-18.
