Second wave of US inflation? Wall Street bulls: Don't panic, US stocks can rise without interest rate cuts
U.S. inflation has fluctuated slightly, with Wall Street bulls believing there is no need to worry excessively. Analysts at hedge fund Citadel stated that unless there is a policy mistake, inflation will gradually converge to the Federal Reserve's target of 2%. At the same time, strong U.S. economic data has led investors to reassess their rate cut expectations. Traders expect the Fed to cut interest rates only twice this year. The market is confident in the Fed's ability to control inflation, and risk assets are expected to continue to rise. Wall Street praises Fed Chairman Powell for his stance against rate cuts last year. Despite slightly higher inflation rates, the Fed still has room to cut rates
US Core CPI unexpectedly rose on Wednesday, putting pressure on the stock market. However, Wall Street bulls believe that slight fluctuations in inflation are a normal phenomenon and there is no need to worry excessively.
On April 11th, according to media reports, David Zervos, Chief Market Strategist at Jefferies, stated that even if the Fed does not cut interest rates, driven by strong economic data, US stocks will continue their upward trend.
Meanwhile, Angel Ubide, Head of Fixed Income and Macroeconomic Research at hedge fund Citadel, mentioned that inflation will not continuously decline and there will be some slight fluctuations, which is a normal phenomenon. He believes that unless there is a policy mistake, inflation should gradually converge towards the Fed's 2% target.
Due to the continued strong US economic data and the Fed's reluctance to ease monetary policy, investors have begun to reassess their expectations for the timing and frequency of rate cuts. Following the release of inflation data on Wednesday, traders now expect the Fed to cut rates only twice this year.
Zervos commented that the market's initial prediction at the beginning of the year of six rate cuts by the Fed this year was "almost as foolish as predicting two rate cuts at the beginning of last year."
While he believes that a significant rate cut is wishful thinking, he also thinks that current policies are still more accommodative compared to traditional measures. He pointed out that the Fed's balance sheet indicates that "the stimulative effects of quantitative easing still remain."
Furthermore, Zervos mentioned that the market seems confident in the Fed's ability to control inflation, which he believes can be seen from the stability of the so-called five-year expected inflation rate.
He continued, "Although the Fed may need to maintain higher interest rates for a longer period to solidify long-term inflation expectations, with positive economic growth dominating the news, risk assets should continue to rise."
He also praised Fed Chairman Powell's stance against rate cuts last year. He said, "In the current situation, his cautious wait-and-see attitude appears wiser."
In Ubide's view, despite the slightly higher inflation rate at present, considering the progress the Fed has made in controlling price growth so far, there is still room for rate cuts, with the key being the Fed needing more confidence in its forecasts. He also pointed out that timely easing policies can prevent an increase in the unemployment rate.
"Now, a slight policy relaxation is feasible," Ubide said. "If policies remain too tight for a long time, it could lead to a breakdown in the labor market."