Market expectations of swift Federal Reserve rate cuts might be premature according to Apollo's Torsten Slok. Citing data like surging GDP growth forecasts, record stock market highs, tightening credit spreads, and resurgent M&A activity, Slok argues for persistent inflation and robust economic growth, potentially delaying cuts. He emphasizes the risks of premature rate cuts reigniting inflation, aligning with the Emerging Real Estate Digest's 2023 prediction of initial cuts followed by potential hikes. Referencing the 1974/75 historical parallel, Slok suggests the Fed might maintain its current stance longer than expected, impacting economic forecasts and investment strategies.
Apollo Chief Economist Takes View that FED Rates Remain High
Chief Economist at Apollo Management, Torsten Slok, sees conditions on the ground that make it irresponsible for the FED rate cuts at this juncture. The main message he was sending to his client through a client note was not to be so fast to sell debt instruments and don't expect rates to drop as quickly as some are predicting:
“The bottom line is that the Fed will spend most of 2024 fighting inflation... As a result, yield levels in fixed income will stay high.” Slok wrote in last week's client note to Apollo investors.
Later, he gave an interview on the matter to Bloomberg which can be viewed below and highlights read below:
“The market now has to realize that the data is just not slowing down, and the Fed pivot has given an additional tailwind to the economy and to financial markets and financial conditions and to capital markets... All that is likely to continue to be supporting growth in consumer spending, in capex spending, in hiring for most likely the better part of this year.”
[paraphrased] "Is it really surprising that inflation is showing signs of moving higher? We've seen a significant rally in the stock markets and all-time highs every day. We've seen significant tightening of credit spreads and significant issuance of new bonds January was the largest issuance in the history of January issuances... and finally, we've seen IOP activity be very strong, and M&A activity has started coming back."
"With this very substantial tailwind in easing in financial conditions, it is really not surprising that we should begin to see more tailwind to employment, more tailwind to consumer spending... all that should mean that we are delaying FED cuts and therefore we will probably have now a few more quarters of strong growth before we begin to see any meaningful slowdown."
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Problem With Cutting Rates to Early
One of Slok's core arguments is that GDP growth expectations have gone up dramatically since late 2023 which this chart demonstrates. This tells Slok that the consensus is forming that maybe there is no near-term slowdown and therefore no FED rate cuts will occur.
Cutting now would risk further easing which would plow into the markets creating more stock market inflation, wage inflation, goods and services inflations, and the matter could quickly spiral out of control. Slok rattles off a handful of indicators in the interview which all seem to indicate that inflation is nowhere near being under control, despite what we are hearing out of Washington DC, some banks, and investment firms.
The IMF noted in 2023, that f the Fed lowers interest rates before inflation is truly under control, it could stimulate demand in the economy, potentially leading to businesses raising prices and consumers spending more. This could reignite inflation, creating a situation where the Fed needs to raise rates again later, potentially causing an economic slowdown or recession. The inability to manage inflation would make businesses and investors lose credibility in the FED's ability to handle the situation more issues.
Emerging Real Estate Digest Predicted Rate Increases in 2023
When the world was banking on FED rate cuts, the Emerging Real Estate Digest made the bold prediction that rates would be first cut, cue to pressure too strong for Jerome Powell, but then once seeing the consequences rates would rapidly be raised.
Specifically, we wrote:
The Fed is under pressure to cut rates. The government will struggle to pay 5% on $33 trillion, and debt repricings are rapidly approaching for large private entities that need rates lowered to survive. The other Western democracies, as well as most emerging economies, can’t lower aggressively until the Americans begin as we have previously explained.
Unfortunately, the cuts will not have the desired effect. Lower rates will lead to a release of pent-up borrowing demand resulting in an avalanche of sovereign, corporate, and personal borrowings. The increased money supply will stun the Fed, and occur in the context of a recessionary economic environment. Only double-digit interest rates will tame the beast.
Mark Twain once remarked, “History doesn’t repeat, but it often rhymes.” In 1974/75 the FED believed it had beaten inflation which had topped out just above 12%. Rates were cut and inflation dropped below 5% only to rise above 13% again by 1979. Inflation was only tamed in the end with double-digit interest rates, topping out at 18%, and new oil field discoveries which lowered energy input costs.
