Analysts pointed out that Federal Reserve Chairman Powell may have paid too much attention to the topic of when to cut interest rates.

First, it is uncertain whether the US inflation rate will return to 2% and stay at this level; second, Powell did not take sufficient account of the sharp increase in the federal deficit.

The Congressional Budget Office (CBO) predicts that the US deficit will reach 5.6% of GDP this year, up from 4.6% in 2019. By 2025, the deficit is expected to jump to 6.1% of GDP.

The CBO's forecast assumes that federal policy will remain the same, but neither current US President Joe Biden nor former President Trump are inclined to fiscal austerity.

Powell has repeatedly stated that he will not lower interest rates until the Federal Reserve is convinced that “the inflation rate continues to fall to 2%.”

In 2021, the Federal Reserve and the Biden administration said they believed inflation was temporary, but this proved wrong. Economists and other prophets have performed very poorly in predicting the post-COVID-19 economy.

An International Monetary Fund (IMF) study of 40 countries' efforts to contain inflation shows that if central banks cut interest rates too early and properly contain inflation before focusing again on economic growth, then long-term economic growth will perform better.

These factors suggest that for the Federal Reserve, delaying interest rate cuts is more appropriate than cutting interest rates early.

Lowering interest rates may increase inflation, and the construction industry is a good example. The Biden administration is making historic investments in manufacturing, from electric vehicles and batteries to semiconductors, all of which are driving a boom in new plant construction.

Another catalyst for inflation is artificial intelligence, which is directing investment into technology and is creating a whole new industry, from chips designed by Nvidia and its competitors to cloud computing infrastructure and software applications from companies such as Microsoft and Google.

Capital market conditions as a result of these developments were very different from those during the global financial crisis and pandemic, when interest rates remained fairly low, inflation was very low, capital was cheap, and large amounts of capital were loaned to companies with lower bond ratings than investment grade. Today, these companies are rushing to refinance their debts in an environment where interest rates are higher.

Furthermore, with high interest rates, capital appears to be being redirected to battery and semiconductor factories, artificial intelligence investments, and other projects that can actually improve the productivity and living standards of the US economy.

Lowering interest rates will fund bankrupt companies and those that are hopeful, and will further heat up the US economy. So Powell's best bet, at least for now, is probably to keep interest rates unchanged.

Editor/Jeffrey