The only reason the Federal Reserve might be tempted to cut rates would be to help the United States cover interest on the national debt, according to fund manager Freddie Lait.
His comments come ahead of the Federal Reserve’s monetary policy decision on Wednesday, which could shed light on the U.S. central bank’s interest rate trajectory. The Fed is widely expected to keep its benchmark overnight borrowing rate in a range between 5.25% and 5.5%.
Traders currently rate only about a 50% chance of a Fed rate cut as soon as September and expect a reduction of just a quarter of a percentage point by the end of the year, according to the CME FedWatch tool.
Speaking on CNBC’s “Squawk Box Europe” on Wednesday, Lait of Latitude Investment Management said he believes the current level of interest rates is “perfectly adequate” to balance inflation and the outlook for growth of the world’s largest economy.
“I think it’s up to the birds to think that in a world where inflation is at an all-time low, and in some cases rising again, and where there are early signs of life, in part because of an economic “Supported by massive government stimulus, they are going to reduce significantly,” Lait said.
“The way we’ve been thinking about it for 15 years, and I’ve been thinking about it for longer as well, there’s no economic justification for cutting spending. The reason they might cut is because the U.S. government can’t afford not to – and that’s a much scarier reason to have to cut,” he added.
CNBC has contacted the Federal Reserve for comment.
Traders work on the floor of the New York Stock Exchange during the morning session April 29, 2024 in New York.
Michael M. Santiago | Getty Images
The US government is paying more to service its growing debt after a period of rapid interest rate hikes, tax cuts and massive stimulus programs designed to support the economy during the Covid-19 pandemic.
A recent analysis from the Congressional Budget Office showed that U.S. federal spending on interest payments is expected to reach $870 billion this year. The forecast reflects a 32% increase from last year’s $659 billion in interest expenses.
Growth in interest payments ‘pretty staggering’
Lait said the “exponential” growth in government spending on U.S. debt would likely pose a problem for whoever wins the November presidential election.
“The facts are there now. You borrowed money. You have a 5.6% budget deficit. Either you withdraw all the stimulus programs and it takes another downturn, which is going to be a real challenge .especially in a country like America where it’s sort of legislated, or you have to borrow that money.”
Asked if he thought the level of US government debt could become unattractive to a number of key international investors, Lait replied: “Yes and the solution would either be to live with much higher yields either with much lower public spending, because this would reduce emissions and solve the problem in a different way. »
He added: “It’s a bit of a conspiracy theory because the level of debt has never mattered. The debt-to-GDP ratio has increased every year since the war. And so it has increased as a straight line and the markets have bullish and bearish trends.
However, Lait said the level of the U.S. national debt is not the issue.
“It’s kind of the changes and the building of it. And I think it’s just the growth of those interest payments that’s really quite astounding,” he said.
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