Fed May Cut Rates for "Soft Landing"
JPMorgan Chase believes that the Federal Reserve may cut interest rates by 250 basis points this year.
Bob Michele, Global Head of Fixed Income at J.P. Morgan Asset Management, stated that it is highly likely that the Federal Reserve will reduce interest rates by up to 250 basis points this year.
If inflation rates decrease while the federal funds rate remains stable, real interest rates will become increasingly restrictive, implying that the Federal Reserve's restrictive policies will gradually become an economic burden.
Michele said:
"The Federal Reserve has orchestrated a soft landing, almost fully achieving a 2% inflation target, with unemployment rates consistently at 4% or below for 24 months. They have accomplished their dual mandate of full employment and price stability; I just think that a soft landing is notoriously difficult to sustain. I hope they can gradually start lowering the federal funds rate, otherwise, real interest rates will become too strong of an economic headwind."
The federal funds rate has remained within the range of 5.25%-5.5% since last July. If it is reduced by 250 basis points, this would bring the rate down to the range of 2.75%-3%. He said that this aligns with the Federal Reserve's anticipated neutral rate of 2.5% and is an appropriate adjustment.
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However, Michele added that the Federal Reserve must still carefully consider its approach, as a premature policy shift could reignite inflation in the case of a soft landing.
He said, "Considering these tail risks, rising inflation is a greater issue. Businesses and households have just digested the high-interest-rate environment; if the Federal Reserve lowers interest rates too early, housing sales begin to rebound, automobile sales rebound, and business investments increase, leading to higher levels of inflation."
His comments were made before the December non-farm employment report, which showed a much hotter labor market than expected. Some believe this will delay the policy adjustments the Federal Reserve is poised to make this year and may even necessitate interest rate hikes.
UBS previously stated that the Federal Reserve might lower interest rates below 3%, but it anticipates a mild recession in the United States by mid-2024 as consumers gradually lose momentum.