Question: How did the Fed manage to create this narrative around rate cuts?
Answer: I think we should go back to last July. We had core inflation at 4.2%, more than twice the target level. But the Fed has decided that this cycle of rate hikes is over. So when you hear about a dovish turn that happened in December, it didn’t happen then, it happened in July.
(Fed Chairman Jerome Powell) took some risks, but one of the reasons for the change was the realization that the more aggressive actions the Fed took going forward, the more harm they could do to the labor market. In subsequent meetings, he continued to emphasize that we cannot wait for inflation to reach 2%. Otherwise, we risk causing significant economic damage.
The Fed is trying to present itself as a hawk. However, I actually think Jay Powell is more of a dove. Many of his actions since July confirm this. I understand that he is trying to organize a soft landing, and I have confidence that he will succeed. The issue of inflation, of course, remains relevant, but I am sure that employment is important for him now. If our assumptions about Powell’s penchant for rate cuts are correct, then September becomes central. If we get more favorable inflation data before September, I have no doubt that September will be important.
Question: How will the November elections be affected?
A: If you look back at the last 10 election years, it’s clear that the Fed does adjust its policy during election years. Fully. Therefore, it is safe to say that the Fed is responding to the real economic situation, and if the economic reality requires that rates be adjusted, even in election years, the Fed will do it, as it always has.
