Forex Trading

USD and inflation outlook: Fed likely to cut rates only in H2


(Partial Video Transcript)

The Fed’s market recalibration

AO: Hello and welcome to trading the markets. I’m Angeline Ong. Earlier, I caught up with John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. I began by asking him what he was hearing, his end in terms of the Federal Reserve (Fed) market recalibration.

JS: Well, the recalibration that that is occurring after a massive rally and lots of capitulation in the fourth quarter of last year by bears is a reassessment of things of what was carrying that run up, how much it may have positioned the market slightly ahead of itself, we think.

And now in a process of reboot, first we saw some profit taking, some rebalancing within portfolios as technology had had gotten a larger share than many thought would be right for getting into this year.

And of course, the idea that some corners of the market really thinking that the Fed could cut rates as much as five or six times.

Inflation makes March rate cut unlikely

AO: We’ve not been in that camp. Now we’re seeing this CME Fed watch tool, we’re seeing the percentage chance for this 25-basis-point rate cut in March, kind of easing.

What is your view, with inflation not really back, you know, that genie back in the bottle, are we realistically going to see this rate cut in March?

JS: Annually we would think not. The Federal Reserve, you know, in terms of Fed speak over the last few days, has really gone from prospects of three cuts to at least one of the Fed presidents, regional presidents, I think, said perhaps just one or two, which when we heard that, we thought, gosh, that’s what we were thinking.

Fed not looking at adopting draconian measures

Inflation is a sticky thing to deal with. It is it is very troublesome to get rid of it once it gets placed into the system. And we don’t think Jerome Powell wants to have to become a Paul Volcker and need to take draconian measures.

And he certainly doesn’t want to be an Arthur Burns, who was the predecessor Paul Volcker and failed to place inflation in check.

So, we think the Fed is going to guide expectations down. It’s already started that and it already has effectively done that to some extent. The market had a bit of a tantrum in here, and I think that was part of the profit taking and repositioning by aggressive investors who likely were highly leveraged.

We can’t help but think that the highly leveraged community is really trying to work to get the Fed to pivot.

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