Trillion-dollar asset management giant: Even if the Federal Reserve cuts interest rates by 100 basis points, interest rates still remain tight!
The Federal Reserve's interest rate policy is under scrutiny, with even a 100 basis point rate cut still indicating a tight policy. Joyce Chang, Managing Director of Research at Morgan Stanley, believes that the Federal Reserve will cut the benchmark interest rate before the end of the year, reflecting concerns about inflation and employment. PGIM economist Tom Porcelli pointed out that the current 5.3% federal funds rate is relatively high, and a rate cut would still leave the policy on the tight side. In addition, while some companies are showing that consumers are more cautious, others like Walmart indicate that consumer willingness to spend remains strong
The market narrative changes so quickly that it can easily catch people off guard. In the past week, traders have been concerned that the US economy is slowing to a worrying extent, providing a reason for the Federal Reserve to significantly cut interest rates starting next month.
Yesterday's data seemed to challenge this view on the surface. Retail sales data exceeded all expectations, jobless claims declined, and Walmart raised its outlook, indicating that consumers are not showing signs of weakness. The initial market reaction was: US bond yields surged, and US stocks rose.
Nevertheless, Joyce Chang, Managing Director of Global Research at Morgan Stanley, still believes that the Federal Reserve has reason to cut the benchmark lending rate by 100 basis points before the end of the year.
In an interview, Joyce Chang said, "For the next six months, the path is actually clearer now, and what we are seeing in terms of the anti-inflation trend combined with the employment path means they are more comfortable taking more aggressive measures. I think this is the information going into the Jackson Hole meeting."
Tom Porcelli, Chief US Economist for Fixed Income at PGIM, holds a similar view, emphasizing that the current 5.3% federal funds rate appears relatively high compared to the current consumer price inflation rate of below 3%.
Porcelli said, " Even with a 100 basis point rate cut, the Fed's policy remains somewhat tight, calibrated based on significantly higher inflation rates and significantly lower unemployment rates, but these conditions have changed."
In the relatively calm mid-August, heated debates about the Federal Reserve are ongoing, which seems more like a situation traders are accustomed to seeing in the summer months. While some companies indicate that consumers are becoming more cautious, others, including Walmart, suggest that consumers still have sufficient willingness and ability to spend.
Harry Sommer, President and CEO of Norwegian Cruise Line Holdings, stated that his company's industry performance is strong, pointing out that due to strong demand, prices will "absolutely rise" from this year until 2025. He also discussed ordering ships into the 2030s.
Matt Miskin of John Hancock Company noted that most investors he spoke with nationwide are concerned about deteriorating growth, but he refuted the extent of economic weakness implied by drastic rate cuts.
He said, "This is the beginning of a rate-cutting cycle, but we do not believe that the current economic conditions urgently require rate cuts."