The data has not shown any substantial slowdown yet! The Federal Reserve may not cut interest rates significantly at all

Apollo's chief economist Torsten Slok warned that investors may need to prepare for disappointment if they expect the Fed to cut rates significantly this year.

In an interview, the chief economist dismissed the possibility of multiple rate cuts by the Fed this year. He believes that the economy is strong enough, and the Fed only needs to cut rates once in September, after which the Fed will pause rate cuts for the remainder of 2024. Rate cuts are meant to stimulate the economy, and he thinks the U.S. is in a position where only one rate cut is needed to achieve this goal.

Slok stated that recent initial jobless claims and retail sales data support this view, as both data points indicate "all is well".

He mentioned encouraging indicators such as restaurant and hotel bookings, weekly corporate default data, and data released by retailers like Target, Walmart, and Max's discount stores.

He noted that the strong earnings and improved guidance from the latter, especially from retailers, have excited Wall Street, showing strong consumer demand. In July, retail sales saw the largest increase in over a year, with a 1% growth compared to an expected 0.3% growth. Slok said, "The narrative of us slowing down is simply not in the data."

However, investors are expecting multiple rate cuts from the Fed in the future. According to the Chicago Mercantile Exchange's FedWatch tool, there is a 67.5% probability of a 25 basis point rate cut by the Fed next month, with further cuts later this year.

Given the overly weak job data in July, concerns have arisen that the Fed's monetary policy has become too tight. Although this report briefly shook the market and exacerbated recession fears, initial jobless claims fell to a five-week low in mid-August.

Meanwhile, revised nonfarm payroll data from April 2023 to March 2024 was better than expected, with a decrease of only 818,000 jobs instead of the expected 1 million. Slok said:

"The Fed's last rate hike was in July 2023, it's been 12 months, 13 months now, and we're still waiting for the data to slow down, but there hasn't been any meaningful slowdown."

While he has long believed that there would be no rate cuts this year, Slok now acknowledges that the Fed will implement a 25 basis point rate cut next month. However, he mentioned that after that, the Fed will continue to follow its "wait-and-see" approach. Slok added, "I understand the market's desire for an economic slowdown, the market's fascination with the Fed's normalization of rates, but we have enough time to achieve rate normalization."

"Wall Street veteran" Ed Yardeni also shares this view, expecting the upcoming nonfarm payrolls report to be much stronger than the July report