After the Federal Reserve decided to cut interest rates by 50 basis points, Rosenberg, former chief economist for North America at Merrill Lynch and current president of Rosenberg Research, was interviewed by MarketWatch.
Rosenberg has been a critic of Powell and the Fed. Rosenberg believes that the Fed's rate cut is the right move, but it is late. He recommends that investors turn to interest rate-sensitive assets, and expects that this rate cut cycle will reduce the federal funds rate to the pre-epidemic level of 1.75%.
MarketWatch: What do you think of the Federal Reserve’s rate cut early Thursday morning? Did the Fed finally get it right this time?
Rosenberg: There are two factors to consider. This rate cut was actually on the table at the last Fed meeting in late July, but they decided not to do it. Normally, they would cut by 25 basis points first and then another 25 basis points. This 50 basis point cut is actually an admission that they missed the opportunity to do the first rate cut six weeks ago, so they doubled down.
MarketWatch: Does this step get us closer to the elusive “soft landing” that Powell and his colleagues are hoping for?
Rosenberg: The base case is that we are in a soft landing right now. If you noticed the tone of Powell's post-meeting press conference, this rate cut is just a down payment to ensure that the soft landing or the "Goldilocks economy" remains intact.
MarketWatch: Do you believe that?
Rosenberg: No, I don't believe in fairy tales. The FOMC is suffering from classic cognitive dissonance. Monetary policy remains too tight. The Fed's 50 basis point cut was simply an admission that it had been too tight for too long, and all Powell did was try to sugarcoat that. How can he talk about the health of the U.S. economy and at the same time say that the downside risks to the labor market outweigh the upside risks to inflation?
MarketWatch: Are you still concerned about the coming recession, or are you relieved by the Fed's actions?
Rosenberg: The Fed's actions do not reassure me at all. While they have caught up to some extent with the curve, they are still far behind. Considering that the federal funds rate has risen more than 500 basis points from its lows, this large rate cut is just a small gap. While the Fed is easing policy, the impact of its actions in 2022 and 2023 is still in front of us. Economic development will not be unimpeded just because it has experienced the most severe tightening cycle since the Volcker era in the 1980s. The recession has been delayed, but it has not been avoided.
Look at the long list of inconsistencies in Powell's comments. He says the labor market is solid, yet in his opening statement he discusses how the employment data is artificially inflated. It's ridiculous to talk about how solid the labor market is and then say the data is inflated. Powell contradicts himself.
Powell mentioned the Fed Beige Book in his press conference. He was not asked to mention it, he mentioned it on his own initiative. The Beige Book is not subject to revisions and it provides a huge amount of information about what is happening across the country. Recently it revealed that half of the United States is in recession. We analyzed the latest Beige Book and found recession signs just like in July 1990, March 2001 and December 2007, so they are far behind the situation.
MarketWatch: What happens now for investors? Talk about the outlook for stocks, bonds, gold and the dollar.
Rosenberg: This means that the 10-year Treasury yield will fall to 2.5% or lower, and Treasury investors can expect stock market-like performance. I tell my clients to buy a lot of long-term zero-coupon bonds, which will provide a good return in the next year if my prediction is correct.
In the stock market, you should buy sectors that do well in periods of slower growth, lower inflation, and lower interest rates. This includes utilities, telecom services, real estate, financials, and high dividend stocks.
As for gold, the core of my current portfolio strategy is a bond-gold allocation. Interest rates will fall, the dollar will depreciate, and gold will appreciate.
MarketWatch: Are you worried that this easing cycle will create a dangerous bubble in the stock market?
Rosenberg: The stock market is already in a price bubble. The market has shown a lot of optimism about earnings in the next few years. Whether the stock market will become even more frothy may be a fact.
But keeping the stock market strong is not part of the Fed's mission. The labor market is. Stock investors should worry about recessions and lower earnings. If the Fed cuts rates and there is no recession, the S&P 500 will rise. If we have a recession, the stock market will fall, even with rate cuts.
MarketWatch: Maybe there is only one rate cut in 2024 and that’s it. What do you expect and, importantly, what should investors actually expect?
Rosenberg: There are two more Fed meetings left this year, and I would not be surprised to see two more 50 basis point rate cuts. But the question is where is the end point of the policy rate?
Look at what Powell said at the Jackson Hole conference in August: "Labor market and inflation pressure points have returned to pre-COVID levels in early 2020." The pre-COVID Fed funds rate was 1.75%. So we're going back to 1.75%. I don't know if it's 2025 or 2026, I just know where the destination is.
MarketWatch: You've been critical of the Fed for lagging on inflation. Do you think Powell and others will learn from their mistakes now?
Rosenberg: Historically, the Fed has always moved gradually. It's a slow-moving machine. When it cut 50 basis points, it saw something that many of us didn't see. People should ask why they cut rates 50 basis points?
The Fed is behind the inflation curve and now it is moving in the other direction on the growth curve. Before, they were saying “don’t worry about inflation” and now they are saying “don’t worry about the economy.” The Fed is wrong in both directions and has been doing so since its inception over a century ago. If the Fed was perfect, we wouldn’t have a recession.
The article is forwarded from: Jinshi Data
