Legendary investor Rob Arnott said that as the risk of inflation rebound approaches, it is not far-fetched for the Federal Reserve to restart interest rate hikes this year.

In an interview, the legendary investor predicted that by the end of this year, the inflation rate will reach 3.5%-5%. He pointed out that the higher this number is, the lower the possibility of the Fed starting a rate-cutting cycle.

The founder of Research Affiliates said, "A 5% inflation rate will be seen as a real blow, which will prevent the Fed from lowering interest rates and may encourage them to raise rates again."

The market is closely watching the inflation situation month by month, and investors are eager to see the inflation rate drop to a low enough level to prompt the Fed to adjust its policies. Currently, the Fed has postponed interest rate cuts, insisting on seeing clear signs of anti-inflation in the data.

But Arnott said that although the May CPI data was lower than expected, it may not be so easy to achieve a sustained cooling of inflation from now until the end of this year. This is because the year-on-year growth rate of inflation is calculated using last year's data, and coincidentally, inflation in the last period of 2023 was benign. He explained:

"If the inflation rate in the last few months of last year was unusually low, the upward pressure on inflation is more likely to be greater than the downward pressure."

The Fed said it expects to cut interest rates only once by 25 basis points this year, lower than the market's expectations of two to three times. The Fed has been criticized for being too dependent on data in its decision-making process.

If inflation eases further, the US economy may weaken enough to prove that the Fed's monetary policy easing is reasonable, but Arnott is not entirely convinced that a rate cut will help boost the economy much. "In my opinion, what role can it play besides boosting market enthusiasm?" He referred to the bull market in US stocks, which is driven by the prospect of lower interest rates.

He added, "I think the Fed is only stimulating bubbles, not the economy."

In contrast, Citigroup believes that there is increasing evidence that the US economy is slowing down. Unemployment rates and initial claims are rising, retail sales data is dropping, new housing construction is down to its lowest level in four years, and soft demand is expected to lead to a series of soft core inflation data. Although there are still some Fed officials suggesting maintaining higher levels for a longer period of time, Fed officials may cut interest rates in September. It is expected that they will send a signal of an imminent rate cut at the July Fed meeting and a stronger signal at the Jackson Hole annual meeting at the end of August.

Edited by Jeffrey