Source: Jin10 Data
Author: Wu Yu.
According to the strategist of Lazard asset management, the rise in unemployment may push inflation and economic cooling, prompting the Fed to cut interest rates more than the market expects.
Lazard asset management company stated that the economic weakness may prompt the Fed to cut interest rates more than the current market expectations this year.
The company's chief market strategist, Ronald Temple, stated in his second-half outlook that his basic prediction is that the Fed will begin to cut interest rates in September and cut interest rates twice later this year. The current benchmark fed fund borrowing rate is 5.25%-5.50%.
Temple stated that both inflation and the economy may cool off this year along with rising unemployment. He pointed out in the report that "by September, the Federal Open Market Committee (FOMC) will have three more inflation and labor market reports to determine if price pressures have been controlled."
Fed Chairman Powell reiterated on Tuesday that he has made "considerable progress" on inflation but is not yet ready to cut interest rates. The Fed's next policy meeting will be held at the end of July, but it is believed that the possibility of cutting interest rates at that time is very small. The remaining meetings this year are in September, November, and December.
Temple's basic forecast for the prospect of a rate cut is more optimistic than the current market view. According to the FedWatch tool from the CME Group as of Tuesday morning, the fed funds futures market implies that the most likely outcome by the end of this year is two 25 basis points rate cuts, and the probability of further rate cuts is about 22%.
The November meeting of the Fed coincides with the same week as the US presidential election, which has led some to speculate that the meeting will maintain interest rates to show independence.
However, Temple stated that the Fed will be able to take action based on economic data. He wrote in the report, "My assumption is that the FOMC will make decisions based on data and market expectations, ignoring political considerations."
However, Temple did warn that even if the Fed cuts interest rates, it may not lead to a significant decline in long-term interest rates, which may be bad news for potential homebuyers waiting for mortgage rates to drop. He said, "I expect the fed funds rate to bottom out at 3.5% or higher, which means that long-term interest rates are unlikely to drop significantly, and the fair value of the US 10-year treasury notes yield is between 4% and 5%. If that's the case, the main benefit of rate cuts will be concentrated on the short end of the yield curve for floating-rate borrowers."
He said, "I expect the fed funds rate to bottom out at 3.5% or higher, which means that long-term interest rates are unlikely to drop significantly, and the fair value of the US 10-year treasury notes yield is between 4% and 5%. If that's the case, the main benefit of rate cuts will be concentrated on the short end of the yield curve for floating-rate borrowers."
Editor / Feynman