Jason Thomas, head of global research and investment strategy at The Carlyle Group, urged investors to prepare for a potential rebound in inflation that would force Federal Reserve officials to converge on interest rates to 4.5%.

Thomas noted that interest rates are still "too high" and predicted the Federal Reserve will cut rates at least twice more after cutting by half a percentage point this week. But as industries that have been stalled by high borrowing costs restart, Thomas said there is a risk of price pressures re-emerging in the world's largest economy.

He said Thursday that could force fund managers to accept a benchmark rate of 4% to 4.5% as the "new normal." The target range for the federal funds rate is 4.75% to 5% after the Fed's policy meeting on Thursday.

He added: “More rate cuts are certainly on the way, but I suspect there is less room for them than futures and the yield curve suggest.”

Traders expect the Fed to cut interest rates by about 70 basis points by the end of the year, which is more aggressive than the 50 basis point rate cut in 2024 predicted in the Fed's so-called "dot plot."

“To think we’re going back to where interest rates were in 2019 would require ignoring the scale of the changes we’ve observed since then,” Thomas said.

At the same time, former Kansas City Fed President Honig also said on Thursday that the Fed's decision to cut interest rates by half a percentage point left room for the risk of inflation returning.

“They are betting that they have inflation under control,” Honig told the Reuters Global Markets Forum. “They have turned their attention to maintaining employment, which does increase the risk of inflation flaring up again in the future.”

The Federal Reserve launched its easing cycle on Thursday with its first rate cut since 2020, citing "greater confidence that inflation is moving toward the Fed's 2% objective" as it now focuses on keeping the labor market healthy.

Aggressive rate cuts by the Federal Reserve have also weighed on an already weaker dollar, said Honig, who served as president of the Kansas City Fed from 1991 to 2011.

The dollar has weakened since July and has now fallen to levels not seen since December 2023 amid growing concerns that the Federal Reserve's aggressive easing stance could undermine its strong position globally.

A weaker dollar would make imports more expensive while also boosting overseas demand for U.S. goods, both of which would add to inflationary pressures, Honig said.

Meanwhile, in addition to a series of policies to "promote growth," the U.S. government plans to borrow at least $2 trillion in new debt to cover the fiscal deficit. Refinancing short-term loans could also push up interest rates. To avoid this, Honig said the Fed may stop shrinking its balance sheet and even consider restarting its efforts to inject money into the economy in the form of quantitative easing. He said:

“That’s a risk for the next six to nine months, but it’s a real risk that no one is paying attention to and I’m watching it very closely.”

Article forwarded from: Jinshi Data