- The Fed is behind on rate cuts, said Paul Gambles, managing partner of MBMG Group.
- Traders are now pricing in a 25 basis point cut as early as March 2024.
- Veteran investor David Roche is “almost certain that the Fed is done raising rates” and inflation will no longer fall to 2%.
The Federal Reserve will need to cut interest rates at least five times next year to prevent the U.S. economy from slipping into recession, according to portfolio manager Paul Gambles.
Gambles, co-founder and managing partner of MBMG Group, told CNBC’s “Squawk Box Asia” that the Fed has fallen behind the curve in rate cuts and that to avoid an extreme and protracted monetary tightening cycle, it needs to make at least five rate cuts on its own in 2024.
“I think Fed policy has become so disconnected from economic factors and reality that you can’t make any assumptions about when the Fed will wake up and sense the extent of the damage it’s actually doing to the economy,” Gambles warned .
The current US key interest rate is 5.25% to 5.50%, the highest level in 22 years. According to the CME FedWatch tool, traders are now expecting a 25 basis point cut as early as March 2024.
Federal Reserve Chairman Jerome Powell said on Friday that it was too early to declare victory over inflation, dampening market expectations for interest rate cuts next year.
“It would be premature to conclude with confidence that we have reached a sufficiently hawkish stance or to speculate about when policy might be eased,” Powell said in prepared remarks.
Recent data from the U.S. suggested easing price pressures, but Powell stressed that policymakers want to “maintain restrictive policies” until they are satisfied that inflation returns significantly to the central bank’s 2% target.
However, financial markets viewed his comments as dovish, causing major Wall Street indexes to hit new highs on Friday and Treasury yields to fall sharply. It now appears that the Federal Reserve is virtually done raising interest rates.
U.S. consumer prices remained unchanged in October from the previous month, raising hopes that the Fed’s aggressive rate hike cycle would lead to a decline in inflation.
The Labor Department’s consumer price index, which measures a broad basket of commonly used goods and services, rose 3.2% in October from a year ago but was unchanged from the previous month.
Veteran investor David Roche told CNBC’s “Squawk Box Asia” that it is “almost certain” the Fed is done raising rates unless there are large external shocks to U.S. inflation in the form of energy or Food, which also means the next interest rate hike will be down.
“I will stay at 3%, which I think is already reflected in many asset prices. I don’t think we will push inflation any further to 2%. It’s too embedded in the economy through all sorts of things,” said Roche, president and global strategist at Independent Strategy.
“Central banks no longer have to fight as hard as before. And therefore the embedded inflation rate will be higher than before, it will be 3% instead of 2%,” said Roche, who correctly predicted the Asian financial crisis in 1997 and the global financial crisis in 2008.
It now remains to be seen what the Fed’s interest rate plans will be at its next and final meeting of the year on December 13th. Most market participants expect the central bank to leave interest rates unchanged.