Macro strategists warn: the Fed should not cut interest rates at all this year
1min read Jim Bianco, CEO and macro strategist at Bianco Research, said the Fed is risking being premature in its interest rate cuts as the US economy gears up for a re-acceleration.
“I don’t think the Fed is going to have any reason to cut rates because rates aren’t necessary and the economy is still functioning well,” Mr Bianco said on Friday. “I expect the economy to rebound in the second half of this year.”
His outlook differs from the consensus on Wall Street, where most analysts and investors expect the Fed to loosen policy at some point this year. That view is supported by the encouraging decline in inflation and the cooling of the labour market. The consumer price index rose at a 3.3 per cent annual rate in June, while the unemployment rate rose to 4.1 per cent.
The Fed futures show that the central bank is likely to have three 25 basis point cuts this year, with the earliest possible start in September.
Brian Rose, an analyst at UBS, wrote on Sunday: “With inflation and the labour market softening, the door to the Fed starting to cut rates appears wide open, and we expect the Fed to signal at the end of this month’s FOMC meeting that they are prepared to cut in September if data remains consistent with recent trends.”
But Mr Bianco’s concern is that US data will not continue to trend as they have. With government spending at high levels and consumer spending remaining strong, rates will stay high.
He said the Fed’s neutral rate was about 4 per cent, and that it would be inappropriate to cut in that environment.
“If the Fed were to cut twice this year, by the end of the year the rate would actually be neutral, given the strength of the US economy, and I don’t think that’s reasonable,” he said.
Of course, some people on Wall Street have the opposite concern. Charles Schwab pointed out that the economic slowdown presages a more severe recession than Mr Bianco expects a rebound.
Charles Schwab had earlier pointed to worrying signs in the labour market, such as the decline in non-farm payrolls and the softness of the ISM services PMI. While that does not immediately presage a recession, a big shock could hurt growth.