Markets are rebounding after Monday's massive meltdown, making rate decisions harder for the Fed

There are talks of an emergency rate cut from the Fed following Monday's market meltdown.

• Markets are rebounding after Monday's meltdown triggered by Japan's interest-rate hike.
• The market volatility will challenge the Fed and BOJ's rate-hike decisions going forward.
• Weak US jobs data is making investors nervous, but the Fed kept high interest rates steady at its last meeting.

Markets are rebounding after Monday's meltdown, injecting challenges into central banks' interest-rate decisions.

In Japan, the benchmark Nikkei 225 index bounced back spectacularly on Tuesday, gaining as much as 11% in early trade — and regaining nearly all its losses after closing 12.4% lower on Monday.

Meanwhile, South Korea's Kospi gained as much as 5.6%, and Taiwan's Taiex jumped nearly 5% after marking new lows on Monday.

US stock futures are also higher on Tuesday after plunging on Monday.

As Kyle Rodda, a senior market analyst at trading platform Capital.com, told Business Insider: "It's wild out there at the moment."

The market volatility is due to a mix of factors including poor earnings results from several tech giants and a weak July payroll report. It's also in part due to the Bank of Japan hiking interest rates to their highest levels in 15 years, sending the Japanese yen up and unraveling a series of global carry trades across regions and time zones.

Central banks are in a bind

The market turmoil has put the BOJ and the US Federal Reserve in tight spots, with analysts and investors questioning the two central banks' timing on interest rate decisions.

As it is, the BOJ's rate hike — which sparked the market rout — has put the central bank's move under intense scrutiny and criticism.

Some analysts are speculating that the BOJ rate cut was because it was under political pressure to shore up the floundering yen, Bloomberg reported on Monday.

As Vishnu Varathan, Mizuho Bank's chief economist of Asia excluding Japan, wrote in a note on Monday, the BOJ is "complicit" in triggering the risk-off trades.

Going forward, the BOJ could have a harder time with the timing of its rate hike decisions. It may also struggle to "credibly backtrack on hawkish guidance that has flown out of control," wrote Varathan, referring to the market rout.

Japan's finance ministry, the BOJ, and the country's financial regulator are meeting on Tuesday to discuss market volatility and the yen's movement, per Nikkei.

Japan's Ministry of Finance, Financial Services Agency, and Bank of Japan will host a senior officials' meeting from 3:00 p.m. to discuss international financial markets, the finance ministry said on Tuesday.

Talks of an emergency rate cut

The market selloff has also made the Fed's rate hike timing harder.

Investors were already jittery due to a weak US July jobs report that came after the Fed's decision last week to stand pat on rates for the eighth straight time.

Now, the market meltdown is throwing a spanner into whether the Fed would be to able to engineer a soft landing for the US economy.

Markets now fear that the Fed's "higher for longer" stance on interest rates is on shaky ground and that the central bank is "inadvertently heading for 'too high for too long' policy mistake," wrote Varathan.

There are even talks of a Fed emergency rate cut now that's being priced into the market.

However, the Fed must strike a "delicate balance to make that distinction between timely and panicked cuts," wrote Varathan.

Capital.com's Rodda said talks of a rate cut seem premature as it appears to be stress and volatility in the stock and currency markets.

"I think the only justification for an emergency meeting is if we see major market dysfunction in funding or treasury markets, which we haven't seen at all, or a total collapse in the labour market, which would probably have to occur because of a major external shock," he said. "Neither has occurred, at least yet."