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Monday\u2019s global stock sell-off shook many professional investors, Wall Street leaders, and economists.\u00a0<\/p>\n
Take Wharton Professor Jeremy Siegel: The veteran stock watcher was quick to call for an emergency rate cut<\/a> as stocks tumbled Monday morning, arguing the economy is slowing and inflation is essentially defeated<\/a>, meaning the Federal Reserve is behind the curve once again.<\/p>\n \u201cIf they\u2019re going to be as slow on the way down as they were on the way up\u2014which, by the way, was the worst policy error in 50 years\u2014then we\u2019re not in for a good time with this economy,\u201d Siegel said, referencing the Fed\u2019s now-infamous \u201ctransitory<\/a>\u201d inflation call and decision to delay rate hikes in 2021.<\/p>\n Pershing Square Capital Management\u2019s Bill Ackman took to X (formerly Twitter) to echo<\/a> that message on Monday. \u201cThe Federal Reserve was too slow to raise rates. Now it is too slow to lower them,\u201d he wrote. At one point during the heat of the sell-off, bond traders even began to believe an emergency rate cut was on the way, pricing in a 60% chance<\/a> of an intermeeting rate cut.<\/p>\n But Mohamed El-Erian, president of Queens\u2019 College at the University of Cambridge, said he doesn\u2019t understand the logic behind the calls for an emergency, or intermeeting, rate cut.<\/p>\n \u201cI strongly oppose this notion of an intermeeting cut. That would be a huge mistake,\u201d he told Fortune<\/em>. \u201cI think it\u2019s a little bit like wanting to go to the emergency room for a cough.\u201d<\/p>\n El-Erian argued that there would be two main issues if the Fed were to implement an emergency rate cut.<\/p>\n \u201cOne is it will inadvertently undermine expectations\u2014it risks making people more cautious, and companies more cautious, and credit providers more cautious,\u201d he said.<\/p>\n The former PIMCO CEO explained that when the Fed opts for an emergency rate cut, it can spook business leaders, Wall Street analysts, and more.\u00a0<\/p>\n \u201cBecause immediately the question is going to be: \u2018why is the Fed doing this? We simply got a slightly weaker employment report. It wasn\u2019t bad, it was weaker. There must be something else. There must be something in markets that has scared the Fed,\u201d he said, doing a bit of Wall Street roleplay.\u00a0<\/p>\n \u201cThe Fed is not going to be able to convince people that there isn\u2019t something that they don\u2019t know,\u201d he added.<\/p>\n This undermining of expectations could even contribute to a recession, El Erian told Yahoo Finance<\/em><\/a> Monday, because when people become increasingly worried about the economy due to a panicking Fed, they spend less, creating a \u201cself-reinforcing negative spiral.\u201d<\/p>\n But the veteran economist told Fortune<\/em> that he still currently sees only a 35% chance of a U.S. recession over the next twelve months\u2014that\u2019s above the 15% norm, but not extreme.<\/p>\n The second reason to avoid an emergency rate cut, in El-Erian\u2019s view, is the \u201cmoral hazard\u201d of the Fed put<\/a>\u2014the idea that whenever markets fall, Fed officials will rush to save them with rate cuts.\u00a0<\/p>\n \u201cMarkets were functioning fine yesterday. There was no breakage in market functioning. What people didn\u2019t like was the volatility. But as long as the market is functioning fine, then the Fed should allow the market to clear itself,\u201d he argued. \u201cOtherwise, it feeds into the moral hazard of markets\u2014that, don\u2019t worry, the Fed will always come in to counter volatility.\u201d<\/p>\n El-Erian expanded on his take in a Bloomberg<\/em> op-ed<\/a> on Tuesday, explaining that although he called for the Fed to cut rates in July, and he still believes not doing so was an error, emergency cuts \u201cwould constitute a policy overreaction\u201d and officials shouldn\u2019t led themselves be \u201cbullied\u201d into this move by investors.<\/p>\n That call now seems quite prescient, with stocks recovering on Tuesday. The Dow<\/a> Jones Industrial Average rose 1.8% by 2:45 pm ET, while the S&P 500 and the tech-heavy Nasdaq<\/a> Composite jumped 2.4% and 2.5%, respectively. Japan\u2019s stock market, after falling more than 12% on its worst day since 1987 on Monday, also managed to recover most of its losses Tuesday, rising 10.23%.<\/p>\n The quick turnaround is likely due to the varied and complex reasons<\/a> behind Monday\u2019s global stock market rout. Although fears of a Fed policy error and potential economic slowdown or even recession did help spark the crash: \u201cThe sharp sell-off in risk assets was overdone relative to the current health of the U.S. economy, which is not on the precipice of a recession,\u201d as Nationwide chief economist Kathy Bostjancic put it in emailed comments to Fortune<\/em>.<\/p>\n El-Erian explained that there were also a few crowded trades that were \u201ccaught offside by the sudden change in both the economic and policy narratives.\u201d<\/p>\nA \u2018policy overreaction\u2019<\/h2>\n
Fed shouldn\u2019t bail out jittery markets<\/h2>\n