“‘They’ve [The Fed] engineered what looks to be a soft landing, inflation is coming down, the economy is still strong. Why would you waste rate cuts now and risk a resurgence of inflation when all you really need to do is declare victory?‘”
Steve Eisman, the legendary investor known for predicting the 2007-2008 U.S. housing crisis as depicted by Michael Lewis in “The Big Short,” said on Monday the U.S. economy remains healthy, so there’s no need for the Federal Reserve to cut interest rates and risk a rebound in inflation that has cooled significantly in recent months.
“I actually think deep down, Powell is petrified of redoing Volcker again,” Eisman said in an interview early Monday with CNBC’s “Squawk Box.” “We’ll wait to see some data if the economy really starts to weaken. Until then, we’ll just leave things the way they are — they seem to be pretty good. What’s the matter with that?”
Fed Chair Jerome Powell on Sunday said that the strength of the economy allows the Fed to be “careful” in deciding when to cut interest rates, but the policymakers are “actively considering” when to dial back their restrictive policy stance. He also reiterated that a March rate-cut is unlikely, echoing remarks he made at a press conference Wednesday.
The central bank last week held the benchmark policy rate unchanged at a range of 5.25%-5.5%, but pushed back on market expectations for a rate cut by its March 19-20 gathering.
See: Opinion: History shows Powell won’t have to hammer the economy the way Volcker did
Many market observers of the Fed’s current monetary-tightening path have drawn parallels to the economic problems that Chair Paul Volcker and the Fed faced in the early 1980s. Volcker, who took charge of the central bank in August 1979, raised interest rates to historic highs and triggered a recession as the price of quashing double-digit inflation.
The U.S. entered recession in January 1980 but returned to growth six months later. However, a deeper and more painful economic downturn took hold in the following year and endured for 18 months and sent unemployment up to over 10% in late-1982, the highest level since the Great Depression.
As of Monday, investors largely took the likelihood of a Fed interest-rate cut in March off the table, but they priced in around 55% chance of at least a quarter-point reduction by May. They also saw a growing likelihood of five rate cuts to come over the course of 2024, down from their previous expectations of six or seven cuts by the year-end, according to the CME FedWatch Tool.
See:‘The small, regional bank business model is unalterably broken,’ says Oppenheimer analyst after New York Community Bancorp stock swoon
Meanwhile, the Neuberger Berman portfolio manager said he doesn’t see a “systemic problem” in the commercial real-estate sector, even after a two-day plunge in U.S. regional-bank stocks last week sparked by investor concerns that New York Community Bancorp’s NYCB, -7.53% dismal earnings signaled broader problems in the sector.
“Office real estate itself is confined to certain community banks and regional banks,” Eisman said. “It’s not a big bank problem. It’s a CMBS [Commercial Mortgage-Backed Securities] problem, but I don’t see a systemic or big problem at this point that’s going to hurt the economy.”
But if consumer credit quality starts to “deteriorate,” like in late 2006, it will have a real negative effect on the economy, Eisman added. “But as long as the consumer is healthy, I don’t think there’s really much to talk about.”
The SPDR S&P Regional Banking ETF KRE continued to tumble on Monday, down 1.3%, while the Invesco KBW Regional Banking ETF KBWR was dropping 1.6%, according to FactSet data.
U.S. stocks were lower on Monday afternoon with the Dow Jones Industrial Average DJIA slumping nearly 300 points, or 0.7%, to 38,379. The S&P 500 SPX was off 0.3% and the Nasdaq Composite COMP was falling 0.2%, according to FactSet data.