Bloomberg Analyst Predicts Fed Rate Cuts Post US Equity Reversal

Bloomberg analyst Mike McGlone has projected that the Federal Reserve will soon cut interest rates, following a reversal in US equities. This forecast comes amid growing signals from Fed officials about a potential shift in monetary policy, marking a pivotal moment in the post-pandemic economic landscape.

As inflation shows signs of cooling and the labor market begins to soften, the central bank appears poised to transition from its aggressive rate-hiking stance to a more accommodative approach.

Fed Rate Cuts Historical Context & Current Economic Indicators

Bloomberg analyst Mike McGlone has forecasted that the Federal Reserve will cut interest rates following a reversal in US equities. McGlone drew parallels between the current economic situation and previous rate hike cycles, noting, “From 2004-06, the Federal Reserve hiked 425 bps and the surprise index floor came in December 2006. September 2007 marked the first rate cut.”

Comparing this to the present, McGlone pointed out that July 2023 saw the last of 525 basis points of rate hikes that began in the first quarter of 2022. However, he cautioned that persistent inflation might delay the Fed’s easing until elevated equities undergo some reversion, which could potentially provide support for gold prices.

This prediction aligns with recent signals from Federal Reserve officials indicating a significant shift in monetary policy. Fed officials, including Chair Jay Powell, have expressed growing confidence in their control over inflation and readiness to adjust their policy direction. This newfound optimism is supported by better-than-expected economic data showing a continued downward trend in consumer price pressures and a softening labor market.

While the Fed has not provided specific details on the timing or extent of potential rate cuts, market expectations generally point to September for the first reduction. Tiffany Wilding, an economist at Pimco, described this as a “done deal” following recent data releases.

The Fed’s focus has shifted to balancing inflation control with avoiding excessive job losses. Chair Powell emphasized to lawmakers that the central bank now faces “two-sided risks” and must be more attentive to potential job losses caused by maintaining high interest rates.

As the Federal Reserve aims for a “soft landing”, reducing inflation without causing a sharp rise in unemployment, the potential easing of monetary policy marks a crucial turning point. The central bank’s ability to navigate this delicate balance will be critical in shaping the economic landscape for American consumers and businesses in the coming months.

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Global Context and Market Expectations

The potential shift in Fed policy aligns with a broader global trend. At the Australian Conference of Economists 2024, US Federal Reserve Governor Lisa Cook discussed the monetary policy response to the pandemic, the rise and fall of inflation in recent years, and current monetary policy challenges. Cook indicated that current data supports the case for Fed rate cuts, suggesting a alignment with other central banks on this pivot.

Market indicators are reflecting these expectations. Traders and Wall Street banks are pricing in a 25 basis point rate cut in September. The CME FedWatch tool shows a significant increase in the probability of a 25 basis point rate cut on September 18, rising to 70% from 46% a month ago.

These market expectations go beyond a single rate cut, with data indicating the possibility of two Fed rate cuts this year. This aligns with the Fed’s goal of achieving a “soft landing” – reducing inflation without causing a sharp rise in unemployment.
The coming months will be crucial in determining how successfully the Federal Reserve can navigate this delicate balance.

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