According to author, fund manager and columnist, Ruchir Sharma, the Federal Reserve’s much-anticipated rate cut later this month, amid substantial political and economic pressures, risks igniting a dangerous asset bubble.
Credit Spreads At Record Lows
Sharma, who is currently chairman of Rockefeller International, says that current financial conditions are far too loose to justify the start of a new easing cycle, while appearing on CNBC’s ‘Squawk on the Street’ on Monday.
“The Fed has never cut interest rates, let alone start an easing cycle, when financial conditions have been this easy,” he said, adding that “credit spreads [are] close to record lows” and “the stock market's obviously very ebullient given the valuations.”
Sharma pointed to the rapid rise of speculative behavior driven by artificial intelligence hype as another warning sign. “We have an AI mania building up as far as the market's concerned,” he notes. “In this environment, for the Fed to be cutting interest rates would be pretty unprecedented.”
While Fed officials cite concerns about the labor market and inflation stabilization, Sharma remains skeptical. "The Fed has missed its inflation target for five years in a row," he said. "Now we’re looking at a rate closer to 3%, and it’s likely to stay that way for the foreseeable future."
He also dismissed the idea that current monetary policy is restrictive, noting the federal government's fiscal stance. “You’re running a fiscal deficit today of 6.5% of GDP,” which he says is very stimulative.
Sharma then criticized the Republicans who had once attacked the Fed’s dovishness, but are now demanding aggressive rate cuts along with President Donald Trump. “I'm really surprised by how many people on Team Trump have now flip-flopped,” he says.
Cuts Will Harm The Labor Market
Last week’s weaker-than-expected jobs report prompted several leading economists to support a rate cut during the upcoming September meeting of the Federal Open Market Committee.
However, economist Peter Schiff pushed back against this, saying that a rate cut could end up harming the labor market by “weakening the dollar, driving up consumer prices, and pushing long-term interest rates higher.”
On Monday, billionaire investor Ken Griffin similarly warned that Trump’s intervention in the Federal Reserve and the undermining of its independence could lead to higher interest rates and inflation. He also said, “The U.S. built its economic credibility slowly over a long time. Once lost, it won’t be easy to regain.”
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