JPMorgan's Bob Michele Forecasts 250bp Rate Cuts This Year, But Says Fed Needs To Be Cautious

Bob Michele, Global Fixed Income Director at JPMorgan Asset Management, recently suggested that it's highly likely the Federal Reserve will cut interest rates by up to 250 basis points in 2024.

He explained that as inflation drops and the federal funds rate remains steady, this will gradually tighten the real interest rate, implying that restrictive policies gradually become an economic burden.

I tip my hat to the Fed. They have engineered a soft landing. You're pretty much bang on the 2% inflation target. You've got unemployment at 4% or below for 24 consecutive months. They've met their dual mandate of full employment and price stability, he said.

I just think soft landings are notoriously difficult to maintain, and their best hope of ensuring that we stay in a soft landing is if they gradually start bringing down the fed funds rate; otherwise real rates will be too powerful a headwind, he added.

The benchmark interest rate has remained between 5.25%-5.5% since July. If it were to be reduced by 250 basis points, it would fall to the 2.75%-3% range. According to Michele, this adjustment is appropriate and in line with the Fed's forecast of a 2.5% neutral interest rate.

However, Bob Michele added that the Federal Reserve still needs to consider its actions with care because premature policy reversals might reaccelerate inflation under the condition of a soft landing.

Looking at these tail risks, higher inflation is the one that is more problematic for markets. Businesses and households just absorb the high-rate environment, and suddenly you see home sales start to pick up again, auto sales pick up and businesses invest, and that creates a higher level of inflation, he said.

Despite that the market seems to be certain that the Fed will cut interest rates this year, hawks still seem to prevail with the Fed. One Fed official suggested that while the rate hikes are probably over, it's not ready to start cutting just yet.

Lorie Logan, Chair of the Federal Reserve Bank of Dallas, warned over the weekend that the Fed may need to resume raising policy rates to prevent recent slides in long-term Treasury yields from reigniting inflation.

If we don't maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we've made. In light of the easing in financial conditions in recent months, we shouldn't take the possibility of another rate increase off the table just yet, she said.