Markets are likely to continue their rally even without Federal Reserve interest rate cuts this year, according to Steven Blitz, chief U.S. economist at TS Lombard. The Fed recently left interest rates unchanged and indicated it still expects three quarter-point cuts by the end of the year. Blitz stated that the market is evolving and the Fed will let the markets figure out the need for rate cuts slowly. Traders are currently pricing in a 55% chance of a rate cut in June, down from nearly 70% last week. Vanguard asset manager also named no rate cuts as their base-case scenario.
Fed Governor Christopher Waller and Atlanta Federal Reserve Bank President Raphael Bostic both discussed potential rate cuts. Waller emphasized there was no rush to cut rates and cited recent inflation data as a reason to hold rates steady for longer. Bostic revised his projection to just one rate cut this year from the two previously expected. Blitz noted that Waller’s statements may have more influence on the market due to his relationship with Fed Chair Jerome Powell. The Fed is taking a cautious approach to rate cuts, evaluating the evolving economic landscape.
Blitz believes the Fed will be prepared to cut rates if the economy falters after June, but the political optics of such a move could be challenging in light of the upcoming presidential election. He explained that cutting rates due to lower inflation while the economy is still strong could be seen as a move in support of President Joe Biden’s re-election. This dynamic may influence the timing of rate cuts, with the market currently projecting a two-thirds probability of a cut in June. Blitz suggested that the Fed’s window for rate cuts may close after June due to political considerations.
Despite potential rate cut uncertainties, Blitz remains optimistic about market performance, citing the diversity and resilience of the U.S. economy. He noted that there will always be geographical and sectoral variations in economic performance, but overall, there is no reason for the equity market to decline. Blitz highlighted the importance of identifying industry leaders and opportunities for investment as an equity investor. He emphasized that the market will likely continue to rise regardless of Fed rate cut decisions, echoing Vanguard’s base-case scenario of no rate cuts this year.
Blitz advocated for a gradual and considered approach by the Fed in evaluating the need for rate cuts, rather than imposing drastic measures. He acknowledged the challenges posed by the current economic and political landscape, emphasizing the Fed’s responsibility to react appropriately to changing conditions. Blitz’s analysis indicates that the Fed may be cautious in implementing rate cuts, considering both economic indicators and political implications. Overall, Blitz’s perspective suggests a complex interplay between economic performance, Fed policy, and political considerations in shaping market expectations.
In conclusion, Blitz’s insights offer a nuanced perspective on the potential impact of Fed interest rate decisions on market behavior and investor sentiment. Despite uncertainties surrounding the timing and necessity of rate cuts, Blitz’s analysis points to a resilient market outlook driven by economic diversity and growth opportunities. The evolving nature of the economic landscape requires a cautious and strategic approach from the Fed, taking into account both economic indicators and political considerations. Overall, Blitz’s assessment underscores the importance of market adaptability and the need for informed decision-making in navigating complex financial dynamics.
