Schwab Executive Favors 25 Basis Point Rate Cut for Market Stability

The chief executive and chief investment officer of Schwab Asset Management, a subsidiary of Charles Schwab Corp., has stated that a 25 basis point interest rate cut by the Federal Reserve next week would be the most favorable scenario for financial assets. However, a more significant reduction could potentially trigger investor concerns.

During a recent conference, the executive noted that if policymakers maintain current borrowing costs, the market, which has already priced in a rate cut, might react negatively. Conversely, if the Federal Reserve takes a more aggressive approach by cutting rates by 50 basis points, investors might interpret this as a sign of economic distress.

"Therefore, a 25 basis point rate cut seems to be the most appropriate choice," the executive said in an interview. "This is the market's general expectation, and I believe it will be seen as a 'fine-tuning' of the current monetary policy."

Currently, traders have fully priced in a 25 basis point rate cut by the Federal Reserve during its September 16-17 policy meeting. The weaker-than-expected employment data released last week has led some Federal Reserve observers to speculate that officials might consider a 50 basis point rate cut this month.

Despite clear signs of weakness in the labor market, the executive believes the U.S. economy is on track for a "soft landing" and that there is no risk of a recession within the range of possibilities. This assessment suggests that the U.S. stock market could continue to rise. However, the executive also anticipates increased market volatility in the coming months following the 31% rise in the S&P 500 index from its April low.

"We believe this presents an opportunity for active fund managers and stock pickers," the executive said. "The performance of individual stocks will become more differentiated."

The executive revealed that over the past three to five months, Schwab Asset Management has been increasing its allocation to small-cap stocks in anticipation of the expected rate cut. The company has also been positioning itself in more cyclical sectors of the market, which typically perform well during the transition from economic slowdown to recovery.

The executive noted that while the labor market has cooled slightly, it remains "quite healthy" and at an acceptable level for investors. Additionally, the stimulus effects of the tax reform law will benefit investors, and both corporate and consumer balance sheets remain robust.

"Overall, these factors will provide strong support for the economy and the market," the executive concluded.