Source: Caixin.

Despite the hawkish stance of Fed officials this week, at the UBS mid-year outlook conference in Singapore on Friday, former St. Louis Fed Chairman Brad said that the recently released US inflation report did revive hopes for a rate cut in September and he favored market expectations of one to two rate cuts by the end of the year.

Is it possible to have two rate cuts this year?

Despite the latest dot plot released by the Fed showing that Fed officials expect only one rate cut in 2024 and the hawkish stance of many Fed officials this week, the market remains optimistic that the Fed will cut rates twice before the end of the year.

UBS's Chief Investment Officer (CIO) predicts that the Fed will cut interest rates twice in September and December 2024 and then once every quarter in 2025.

"I think it's possible based on the data we have today and what we know about the Fed's plans," Brad commented on this path of rate cuts. "It's a good plan." But he also cautiously added that no one really knows what will happen. "The committee could also choose to be patient for the same reason, so they'll wait for more inflation reports to come out this summer and then make a decision at that time."

"I believe with the data we have today and our understanding of the Fed's plans, it's possible. It's a good plan," Brad said. "But, for the same reasons, the committee could be patient, so they'll wait for more inflation reports to come out this summer and then make a decision at that time."

Former "hawk king" soothes the market.

Brad is the longest-serving regional Fed chairman, having served as St. Louis Fed chairman from 2008 to 2023. After stepping down last year, he chose to join the Purdue University business school as dean.

During his tenure at the St. Louis Fed, he took an overall hawkish stance, advocating more aggressive policy action to curb accelerating inflation at the time. For this reason, he was once called the "hawk king" of the Fed by the media.

But now, with US inflation steadily declining, the "former hawk king" has also eased his tone, frequently soothing the market and emphasizing that rate cuts are possible by year-end.

In an interview in April of this year, Brad said that with the US inflation rate falling to the Fed's target of 2%, he expected three rate cuts in 2024. However, with the release of the Fed's June dot plot, Brad also lowered his expectations for rate cuts this year to two.

At the same time, he emphasized that he believes the Fed is unlikely to raise interest rates.

"I think that's unlikely (to raise rates). I think...if the (Federal Open Market Committee) wants to take a more hawkish policy, they may keep policy rates unchanged as inflation continues to decline. Given the current level of inflation, this is already enough to put downward pressure on inflation," he said. "So I think there's no reason or necessity to raise rates further. They may just postpone any easing policies that might otherwise have been implemented."

US economic growth is a "surprise".

Brad also expects the outlook for US economic growth to remain "strong."

"The main surprise in the United States...was in the second half of 2023. This was a big surprise, because as you can see, the market had expected a recession in the second half of 2023, but it did not happen. Instead, US economic growth reached an annualized rate of more than 4% in the second half of 2023."

He added that despite a slight slowdown in US economic growth in the first half of 2024, it still achieved "relatively rapid growth." In the first quarter of 2024, US real GDP grew 1.3% year-on-year.

"Overall, I think economic growth in the first half of 2024 will be above trend, which will drive very positive results in the US labor market and other bullish factors," he said.

However, he pointed out that he expects US economic growth to not continue to increase at an above-trend rate and will begin to slow down.

"I think that the global financial market has recognized that the US economy will not eventually fall into recession, but will only slow down to the trend growth rate-which will be around 2% for the US. So this could be the best outlook."

When asked if he expected a "soft landing" for the US economy, he answered that he "definitely belongs to the 'soft landing' camp".

US inflation will gradually cool down.

Brad pointed out that in 2022, the Fed responded positively to inflation and raised interest rates by 75 basis points for four consecutive times. Fed Chairman Powell's speech at the Jackson Hole Annual Meeting in August 2022 also focused on inflation. This is a huge change compared to one year ago when the Fed was concerned about the labor market.

These measures focused on inflation targets have had a good effect in 2023: US inflation has dropped from 5.7% in 2022 to 3.9%.

On June 13, the US Department of Labor released inflation data for May: US May CPI increased by 3.27% year-on-year (expected 3.4%) and 0.01% month-on-month (expected 0.1%); Core CPI increased by 3.42% year-on-year (expected 3.5%) and 0.16% month-on-month (expected 0.3%), which were lower than expected.

"Many inflation issues... haven't completely ended in the first half of 2024, so this is a bit tricky, but I expect inflation to gradually cool down now, as shown in the latest inflation report, which will allow the Fed to continue implementing interest rate reduction plans from the second half of 2024 to 2025." Brad said.

Editor/Lambor