A top economist said that Fed Chairman Powell had already created an easier environment for the financial market, which made the Fed's interest rate cut task even more difficult.

Apollo's chief economist, Torsten Slok, said that Bloomberg's US financial conditions index showed that the credit availability and cost of currency, bonds, and stock markets were significantly more favorable than when the Fed began raising interest rates in March 2022.

This was the result of the Fed's policy shift in November last year, when Powell hinted that inflation had cooled enough to stop raising interest rates and began considering when to start lowering them.

Wall Street misinterpreted these remarks, believing that the Fed was about to roll out an easy monetary policy, and expected up to six interest rate cuts by the Fed in 2024, triggering a sharp rebound in the US stock market.

In a blog post last week, he estimated that the S&P 500 index had added $9 trillion in market value since then, comparing it to last year's $19 trillion consumer spending. He wrote:

"In other words, in a few months, the household sector has received an unexpected gain equivalent to about 50% of last year's consumer spending!"

At the same time, the US federal government has invested trillions of dollars in infrastructure, green energy plans, and semiconductor production capacity. Therefore, as fiscal stimulus continues to drive economic growth and a looser financial environment offsets the impact of Fed rate hikes, the US economy remains strong.

In fact, the US economy was very strong earlier this year, with inflation data higher than expected and showing signs of reacceleration. This forced Powell to warn that interest rates could remain high "as long as necessary" because it seemed to take longer than expected for inflation to return to the Fed's 2% target.

However, Powell acknowledged that the likelihood of further Fed rate hikes was low and reiterated the Fed's next move, which is likely to be a rate cut whenever it is.

In his view, this is precisely the mistake Powell is making. Slok wrote, "Looking ahead, with US stocks hitting new historic highs and fiscal policy still supportive, the market expects the economy to continue to accelerate in the coming quarters. This can be called the Fed's interest rate cut reflexivity paradox, the more the Fed insists that the next step is to cut interest rates, the looser financial conditions will be, making it more difficult for the Fed to cut interest rates."

It is certain that the US GDP growth rate in the first quarter of this year has slowed down compared to the fourth quarter of last year, and the annualized growth rate has also been revised down from the previous 1.6% to 1.3%. The latest report also showed that the effect of fiscal stimulus is diminishing. However, consumer spending in the service sector remains strong, and recent initial jobless claims data shows that the job market continues to remain robust.

Meanwhile, minutes from the Fed's last policy meeting showed that in the face of high rates in 2023, the resilience of the US economy has led some officials to doubt whether all their tightening measures have exerted enough pressure on economic growth. The minutes of the meeting stated that the impact of high interest rates "may be smaller than in the past".

Editor/ruby