A financial expert and market analyst predicts that the Federal Reserve will be forced to implement an emergency rate cut before its scheduled meeting in September to mitigate the recent major sell-off in stocks. Robert Prechter, founder and chairman of Elliott Wave International, aired his concerns during an interview with Neil Cavuto on Fox Business, suggesting the Federal Reserve missed a crucial opportunity at its previous meeting to address the turmoil in the ongoing market
Prechter expressed his belief that an emergency rate cut is imminent due to the rapid decline in rates. The last time the Fed made this move was during the early stages of the COVID-19 pandemic. However, many experts argue that another emergency cut could signal that the US economy is in dire straits, which could exacerbate market anxieties.
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In January, Prechter had warned that excessive optimism in the market posed a significant risk. Now he says that this optimism has taken deep root and that the world is witnessing the most inflated market in history.
Following the release of the July jobs report, which revealed a rise in unemployment to levels not seen since October 2021, global markets fell sharply amid the concern that the US economy is faltering.
The stock market continued to plummet on Monday, with Tokyo's Nikkei 225 index, the world's third-largest stock, suffering its worst one-day drop in nearly four decades, down 12 per one hundred. The S&P 500 fell 3 percent, marking its biggest decline in nearly two years. The Dow Jones fell 1,033 points, or 2.6 percent, while the Nasdaq fell 3.4 percent.
Bloomberg estimates that roughly $6.4 trillion has been wiped off the value of global stock markets over the past three weeks.
According to Prechter, much of this could have been avoided if the Federal Reserve had chosen to cut rates at its last meeting. He criticized the Fed for missing a crucial opportunity to cut the fed funds rate by a quarter of a point.
Economists at Goldman Sachs have now raised the likelihood that the US will enter a recession over the next year from 15% to 25%, while analysts at JP Morgan estimate a 50% chance.
The Federal Reserve has been raising interest rates since March 2022 to fight inflation, but a leading economist believes the agency is too focused on that one goal.
Allianz's chief economic adviser, Mohamed El-Erian, has blamed the Fed for the current state of the market, arguing that rate hikes are hitting the economy hard. He expressed concern that the US could lose its economic exceptionalism because of a political mistake.
Even if the Fed waits until September to cut rates, most industry observers predict a rate cut is inevitable.
Analysts at JP Morgan have written a note suggesting the Fed appears to be significantly overdue and predict a 50 basis point cut at the September meeting, followed by another 50 basis point cut in November.
Investors now expect other major central banks to follow the Fed's lead and cut rates aggressively, with the European Central Bank expected to cut rates by 67 basis points by Christmas.
Anticipated rate cuts by the Federal Reserve could have a positive impact on gold prices. This is because when interest rates are reduced, interest bearing investments such as bonds become less attractive and investors often turn to gold as an alternative investment. Also, gold prices have historically risen when the Federal Reserve has cut interest rates.
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