Bridgewater Co-CIO: The Fed Needs More Time Than Market Expects to Cut Interest Rates
Karniol-Tambour said that looking back, if we want the Federal Reserve to cut interest rates quickly, we would find that the economy needs to collapse rapidly. However, this is far from our current situation. The bond market expects many interest rate cuts next year, but this is likely to be difficult to achieve.
Karen Karniol-Tambour, Co-Chief Investment Officer at Bridgewater Associates, suggests that the pace of future interest rate cuts by the Federal Reserve may be slower than what many market participants expect. Looking back, if you want the Fed to cut rates quickly, you would find that the economy needs to collapse rapidly. However, this is far from our current situation.
Current swap market trading indicates that investors expect the US overnight interest rate to fall to around 4.25% by the end of next year, significantly lower than the current rate of 5.33%. Karniol-Tambour points out that while the bond market expects many rate cuts next year, she believes that it will be difficult to achieve.
Karniol-Tambour believes that the Fed will not be in a hurry to raise or lower interest rates. "If I were in their (the Fed's) position, I would think that the threshold is quite high, whether it is in the direction of raising or lowering rates. I need to see how things develop. I certainly wouldn't be excited about a significant rate cut when inflation is higher or stickier than it should be."
On Thursday, the US Department of Commerce released a report on personal consumption expenditures, which is evidence of sticky inflation and the resilience of the economy:
Adjusted for inflation, US real personal consumption expenditures increased by 0.6% MoM in July, exceeding the expected 0.5% and higher than June's 0.4%, marking the strongest growth so far this year.
The Fed's favorite inflation indicator, the core PCE price index excluding food and energy, rose slightly from 4.1% YoY in June to 4.2%, in line with market expectations. It increased by 0.2% MoM, in line with expectations and the previous value.
Of greater concern is the Fed's view on inflation in the service sector, excluding housing. The corresponding PCE price index shows that service sector inflation remains largely at high levels.
Karniol-Tambour, 38, was appointed Co-Chief Investment Officer of Bridgewater Associates earlier this year. Her views align with signals from some senior Fed officials.
On the same day, Raphael Bostic, President of the Federal Reserve Bank of Atlanta, stated that the monetary policy stance should be cautious, patient, and resolute. Having a cautious view does not mean relaxing policy in the short term. Excessive tightening would cause unnecessary pain.
Bostic believes that US inflation is still too high. If inflation accelerates, it will support further policy tightening. Sufficient tightening can reduce the inflation rate to 2% within a reasonable time frame. The path to achieving the 2% inflation target is not expected to be smooth. The US labor market is going through a period of policy calmness.