Federal Reserve Bank Chairman Jerome Powell speaks during a news conference in the bank’s William McChesney Martin Building March 20, 2024 in Washington, DC.
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Markets will continue to recover even if the Federal Reserve chooses not to cut interest rates this year, according to Steven Blitz, chief U.S. economist at TS Lombard.
His comments come as investors await the release of new U.S. economic data and closely monitor hints from Fed officials on the expected number of interest rate cuts in 2024.
Last week, the US central bank left interest rates unchanged for the fifth consecutive time, in line with expectations, keeping its benchmark overnight borrowing rate in a range between 5.25% and 5. 5%. The Fed also said at the time that it still expected cuts of three-quarters of a percentage point by the end of the year.
That message fueled a rally in markets in the United States and abroad, with benchmark indexes hitting new record highs since then.
Asked Thursday about the likelihood of one or no Fed interest rate cuts this year, Blitz said the situation is “getting pretty good.” You know 0.4% month over month is a high number, and you know they’re looking at that. I don’t just look year after year. »
“Really, what’s happening here is an evolution, isn’t it?” Blitz told CNBC’s “Squawk Box Europe” on Thursday.
“They (the Fed) have already told you they won’t raise rates to try to shorten the time frame to get to 2%, so if you’re the market, you’re like ‘well, that’s no big deal ‘” Blitz said. .
“The key is…let the markets figure that out, rather than the Fed imposing that view. Let’s let everyone slowly move toward that position, and then everything will be fine.”
Traders currently rate the chance of a first Fed rate cut in June at around 55%, according to the CME FedWatch tool. That’s down from nearly 70% last week.
Blitz said markets would likely continue to advance even if the Fed decided not to impose an interest rate cut this year – an outlook that US asset manager Vanguard cited as a base case scenario.
“It’s a very large and diverse economy and it’s a very large country. So all the geographic regions and all the industries in all the corners of the country never do well. There are always leaders (and) Latecomers, it’s just the nature of the country. Stupid, right?'” Blitz said.
“The job of the stock investor is to identify what is doing best, you know, where the value is, but as an economist who steps back, you say no, there’s no reason for the stock market to fall.”
A narrow window for a rate cut?
Fed Governor Christopher Waller said on Wednesday there was “no urgency” to cut the US central bank’s key rate in order to normalize its policy.
Speaking at a meeting of the Economic Club of New York, Waller cited recent inflation data, which “tells me that it is prudent to keep this rate at its current restrictive level perhaps more longer than expected to help keep inflation on a sustainable path toward 2 percent.” “.
Separately, Atlanta Federal Reserve President Raphael Bostic said last week that he now expects just one quarter-point rate cut this year, down from two reductions that he had previously planned.
“I think Bostic is an important voice, but I think Waller is much more important. I think he’s seen as sort of an alter ego of (Fed Chairman Jerome) Powell, so when he says something, the markets should react to it,” Blitz said.
“To be fair to the Fed, which I don’t need to be, but to be fair to the Fed, they’re kind of evolving, and they’re doing the right thing by not rushing in any direction.”
Christopher Waller, Governor of the US Federal Reserve, during a Fed Listens event in Washington, DC, US, Friday March 22, 2024. A trio of central bank decisions this week sent a clear message to markets that officials are preparing to relax their obligations. monetary policy, reviving investors’ appetite for risk.
Bloomberg | Bloomberg | Getty Images
Blitz said the Fed would be prepared to cut rates if the world’s largest economy collapsed after June, but warned that the optics of such a move could become “very difficult” in the second half of the year, citing the presidential election coming in November. .
“If they’re doing it, it’s because inflation is lower and they don’t want to passively become more restrictive,” Blitz said.
“If you think about it in terms of policy, which we can’t avoid this year in the United States, if they cut rates just because inflation is lower but the economy is still doing well, l “The optics are that he’s on the committee to re-elect (President Joe) Biden, right? So even though we all understand the reason they’re cutting is because inflation is at 3% instead of 4%, etc.
Asked if that might be one reason the Fed might not be able to wait too long to cut rates, Blitz said: “Exactly. And that’s why the market is sitting there with a two-thirds chance of a cut in June because that’s kind of a cut that they can only do in June, and after June the window to do that is closed. . »
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