Market optimism over the potential for rate of interest cuts subsequent yr is dangerously overdone, in keeping with former FDIC Chair Sheila Bair.
Bair, who ran the FDIC through the 2008 monetary disaster, advised Federal Reserve Chair Jerome Powell was irresponsibly dovish finally week’s coverage assembly by creating “irrational exuberance” amongst traders.
“The focus still needs to be on inflation,” Bair informed CNBC’s “Fast Money” on Thursday. “There’s a long way to go on this fight. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far.”
After holding charges regular Wednesday for the third time in a row, the Fed set an expectation for at least three rate cuts subsequent yr totaling 75 foundation factors. And the markets ran with it.
The Dow hit all-time highs within the final three days of last week. The blue-chip index is on its longest weekly win streak since 2019 whereas the S&P 500 is on its longest weekly win streak since 2017. It is now 115% above its Covid-19 pandemic low.
Bair mentioned she believes the market’s bullish response to the Fed is on borrowed time.
“This is a mistake. I think they need to keep their eye on the inflation ball and tame the market, not reinforce it with this … dovish dot plot,” Bair mentioned. “My concern is the prospect of the significant lowering of rates in 2024.”
Bair nonetheless sees costs for companies and rental housing as severe sticky spots. Plus, she worries that deficit spending, commerce restrictions and an growing older inhabitants may even create significant inflation pressures.
“[Rates] should stay put. We’ve got good trend lines. We need to be patient and watch and see how this plays out,” Bair mentioned.
