Torsten Slok, Chief Economist at Apollo Global Management, recently warned that the frenzy for artificial intelligence (AI) has taken over the US stock market, which may make it difficult for the Federal Reserve to cut interest rates this year.
According to Slok, the Federal Reserve may not cut interest rates at all this year, although last week's updated chart indicates that the vast majority of officials still expect to cut rates at least three times this year.
He explained that his view is partly due to the frenzy in the AI stock market, where investors are still attracted to the hype of artificial intelligence companies such as NVIDIA.
"We are absolutely in the artificial intelligence foam. The side effect is that when technology stocks rise, it will ease the financial situation. This makes the work of the Federal Reserve more difficult," he said.
The loose financial environment goes against the goals of the Federal Reserve, and central bank officials are still closely monitoring inflation and asset prices. The federal funds rate is at its highest level since 2001, and although inflation has cooled significantly from its peak in the summer of 2022, it is still hovering above the Federal Reserve's target of 2%.
Slok and other economists warn that inflation may remain high for a longer period of time, which means the Federal Reserve may postpone its interest rate cut schedule to 2025. Mohamed El Erian, Allianz's chief economic advisor, recently warned that supply chain pressure is still lingering in the economy, indicating that prices may be more sticky than in the past.
Slok said that assuming economic growth continues to accelerate, the Federal Reserve may even resume interest rate hikes later this year. According to the latest GDP forecast from the Federal Reserve Bank of Atlanta, GDP is expected to grow by 2.1% this quarter.
He added that higher long-term interest rates also mean that the Federal Reserve faces the risk of triggering fluctuations in the financial system. He refers to the high debt burden in industries such as commercial real estate. Higher borrowing costs may lead to some debtors going bankrupt, which could lead to more regional banking troubles.
"This is not my basic situation at all, but it will be the mother of all painful transactions. No one is prepared for this kind of risk," he said.
In fact, even Federal Reserve officials have been pouring cold water on the market recently. Atlanta Fed Chairman Bostic has stated on more than one occasion that he expects to only cut interest rates once this year. Other officials are also constantly emphasizing the need for caution in the initial surrender.
In addition, the latest updated dot matrix actually implies the voice of hawks: two officials expect the Federal Reserve to remain stagnant this year, and another "hawk king" even believes that interest rate cuts will not be initiated until the end of next year.