The Manila Times

While waiting for rate cuts

- LUNDGREEN’S GLOBAL PERSPECTIV­E PETER LUNDGREEN

LAST year, the US Federal Reserve Bank, the Fed for short, announced that in 2024 it would cut interest rates from the highest level in more than 20 years. It did not say precisely when, but based on the indication­s at that time the mid-year was a good forecast.

However, a majority in the American bond market had long made the bet that the Fed would cut interest rates faster than the central bank expected itself, and this is actually an interestin­g position.

The market optimism carried into this year, so much so that the chairman of the Fed, James Powell, cooled markets down on January 31. It was a sort of ad hoc press conference, which for me confirmed that he found it necessary to communicat­e.

A month ago, there was leading speculatio­n of a US rate cut in March, but this was clearly called off by the central bank head. Of course, it disappoint­ed a major part of Wall Street, though the message was explained more in detail when the minutes from the latest monetary policy meeting were released on Wednesday, February 21.

Words from the Fed excite not only investors on Wall Street. Many around the world are waiting for rate cuts, including central banks and government­s in emerging markets. And what did the Fed say?

The main focus remains on inflation, which the US central bank finds is still too high. The minutes confirm that this really is in focus and therefore the Fed investigat­es all inflation components in detail. The short version of my conclusion about the minutes is a recognitio­n

by the Fed that some components are pointing to lower inflation.

The communicat­ion from the Fed balanced the markets toward rate cut expectatio­ns in June this year; it also confirms that the next rate move remains a cut.

This is what I would describe as a balanced view, and it is also my primary view. It means my expectatio­ns currently are very much in line with general expectatio­ns in the financial markets. It is also my assessment that these expectatio­ns are representa­tive of a broad share of the financial markets. Said another way, almost all of us in the financial markets expect the same.

Decades of experience have shown that such market situations are where risks can create very volatile situations because close to all financial market participan­ts will be surprised if reality turns out to be different from the expectatio­ns. But is it likely at all?

In financial markets, everything is always possible and — as mentioned — it is a risk alone that all market participan­ts expect the same. One definition of risk is that it simply is equal to the unexpected that happens. In my view, the biggest risk is that inflation shoots up again.

The global economy is most likely to gear further down this year; not dramatical­ly, but it is the direction. A part of the story is weaker industrial production in many countries, a developmen­t that will reduce inflation pressures further. Food prices are currently also under control, though nature is unpredicta­ble, so food production can suddenly disappoint.

Energy prices are also balanced for the time being. I see risks on the upside that are linked to the Russian war on Ukraine and the conflict in the Middle East. Yes, energy prices are a risk that concerns part of inflation, though they are not alarming right now.

Apart from inflation pressure coming down slowly, I am very convinced that the Fed will cut the rates as soon as possible. It will be too painful for the central bank if it can be claimed that it provoked the US economy into even lower growth because interest rates stayed too high for too long.

It is not the situation yet but what I describe I regard as an important force to cut interest rates as fast as possible. Until then it is just about waiting, because the rate cuts will come.

Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a profession­al investment advisor with over 30 years of experience and a power entreprene­ur in investment and finance. Lundgreen is an internatio­nal columnist and speaker on topics about the global financial markets.

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