Global stock market rout deepens, Dow Jones plunges more than 1,100 points, S&P 500 and Nasdaq fall 3%

A series of weaker-than-expected economic data, including a surprise rise in the unemployment rate that triggered a closely watched recession indicator, sent markets lower.

Investors have now decided that bad economic news is bad news for markets, as the growth trajectory becomes clearer. Economists broadly agree that the risks of the Federal Reserve keeping interest rates too high and potentially slowing economic growth have increased.

But there is no consensus on how quickly the Fed should adjust policy to address this risk. As of Monday afternoon, markets were pricing in more than five interest rate cuts by the end of the Fed’s January 2025 meeting, about two more cuts than markets had anticipated less than a week ago, on July 31.

The prices are consistent with economists’ estimates that the Fed is “off the hook” and that a policy change is needed as inflation falls and, subsequently, current interest rate levels become more restrictive despite the Fed’s inaction.

“Monetary policy is currently quite tight,” Wells Fargo chief economist Jay Bryson wrote in a research note Monday, calling for a 100 basis point cut at the Fed’s next two meetings. “We believe the FOMC needs to quickly return to a ‘neutral’ stance on monetary policy or risk falling into a vicious cycle of labor market weakness leading to stagnant spending, leading to further labor market weakness, and so on.”

Deutsche Bank’s economics team, which is sticking to its forecast of three rate cuts this year, sees things differently. Brett Ryan, senior U.S. economist, told Yahoo Finance that recent market moves look like a “rush” by market participants that may have been overly optimistic rather than an accurate recalibration.

Ryan added that the key remains to see more data to explain whether the weakness in the July jobs report was an aberration due to one-off issues like Hurricane Beryl or confirmation that a trend is developing.

“You don’t want to overreact to any one data point,” Ryan said. “So there’s no question that risks have increased, which is giving the Fed an incentive to start with a more aggressive pace of rate cuts, but we’re not there yet.”