Bob Michele, Global Head of Fixed Income at JPMorgan Asset Management, recently stated that the Federal Reserve is likely to lower interest rates by up to 250 basis points in 2024.
He explained that if the inflation rate decreases and the federal funds rate remains stable, it will gradually tighten the real interest rate, which means restrictive policies will gradually become an economic burden.
He said, "I pay tribute to the Federal Reserve. They planned a soft landing. They almost fully achieved their inflation target of 2%. The unemployment rate has remained at 4% or below for 24 consecutive months. They have completed the dual task of full employment and price stability."
"I just think that a soft landing is notoriously difficult to maintain. Their (Federal Reserve) biggest hope for us to maintain a soft landing is that they will gradually start lowering the federal funds rate. Otherwise, interest rates will become an overly strong headwind," he added.
Since July, the benchmark interest rate has remained between 5.25% and 5.5%. If lowered by 250 basis points, the benchmark interest rate will fall to the 2.75% -3% range. Michele stated that this aligns with the Federal Reserve's forecast of a neutral interest rate of 2.5% and is an appropriate adjustment.
Turning also requires caution
However, Bob Michele also added that the Federal Reserve still needs to carefully consider its approach, as premature policy shifts may re accelerate inflation in the event of a soft landing.
"Considering these tail risks, rising inflation is a bigger problem for the market. Companies and households have just adapted to a high interest rate environment, and suddenly, you will see a rebound in housing and car sales, an increase in corporate investment, which may lead to higher levels of inflation," he said.
Although the market seems to be convinced that the Federal Reserve will cut interest rates this year, there are still hawkish winds within the Fed. The bank's director Bauman said yesterday that the interest rate hike may have ended, but he is not yet ready to start cutting rates.
Lorie Logan, chairman of the Dallas Federal Reserve, warned last weekend that the Federal Reserve may need to resume raising policy interest rates to prevent the recent decline in long-term treasury bond bond yields from triggering inflation again.
"If we cannot maintain a sufficiently tight financial environment, there is a risk of inflation rebounding and reversing the progress we have made. Given the easing of the financial environment in recent months, we should not rule out the possibility of further interest rate hikes," she said.