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With both the labor market and inflation starting to cool, nearly everyone on Wall Street expects the Federal Reserve to cut rates in September. But how much they will cut by? That's still up for debate
Infrastructure Capital Advisors CEO Jay Hatfield thinks the Fed will only cut by 25 basis points, saying the idea that the central bank will trim rates by 50 basis points is "patently ridiculous." "They have no ability to forecast. They're going to be conservative," Hatfield says, though he does think the Fed will continue to cut as the year progresses, arguing inflation will continue to ease.
Watch the video to hear why Hatfield doesn't think the markets will sell-off sharply if the Fed only cuts by 25 basis points next month.
For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.
This post was written by Stephanie Mikulich.
For more on a strong day for the markets, joining us now is Jay Hatfield. He is infrastructure capital advisors CEO. And Jay, I just want to start with the market action from today. I mean, we got a pretty significant bounce off this better than expected PPI report. We had all been talking about the CPI report, the inflation report that comes out tomorrow and I guess I'm sort of curious. Do you feel like good news is perhaps maybe a little bit priced in going into tomorrow's report, given the jump that we saw in stocks today?
Well, thanks for having me on, Josh and Julie.
Well, the real critical element isn't even CPI. We're projecting it comes in line 0.2, 0.2. I don't think there's going to be a lot of volatility, although rounding kicks in, which is ridiculous, but true. Like so 0.14 is, you know, miles better than 0.155 whatever. So that's kind of insane. But the reason PPI mattered, well, partly the reaction is just we're bouncing off this crash down to 5,000. So anything that's hints of good news is going to create a big rally. But more importantly, we redid our PCE projection at the end of the month and we're coming out with 0.15. That assumes the point two tomorrow that we're also projecting. And that matters a lot because we don't want to derail the Fed. I mean, they are very conservative, like this notion they're going to cut twice is patently, I mean, do 50 base points patently ridiculous. They're never going to do that. They have no ability to forecast. They're going to be conservative. So they could even not cut in September. I don't think that's going to happen. But if we get that 0.15 at the end of the month, then we're we're sure to cut at least one 25 basis points.
Do you think then they'll be done for the year?
I don't think so because we are bullish about inflation long term. A lot of people think inflation just magically, uh, you know, skyrockets. It only happens really from loose monetary policy and supply shocks, which are almost always energy. And so energy prices are are low. Oil's right where it started the year. Natural gas down 33%. Money supplies only grown three. So we're very bullish about inflation. They definitely should cut. And we think that we're not going to go into recession, but the cuts are required because we've had 80 basis points of cuts by the market because the 10 years now down 80 from where we were just a few months ago.
Well, I want to ask you about sort of what the market's been guessing here because we are at a point where the markets basically expecting four cuts, right? Really probably pricing in a 50 bips cut in September, that's been teetering. What's that going to do to sentiment if we don't get a 50 basis point cut in September and if we don't get four cuts this year? I mean, at some point, is that going to maybe be a shock to the market to the downside?
Well, I mean, first of all, luckily the market's very irrational or otherwise we wouldn't have jobs, right? We just have computers trading all day, so the market was way too optimistic at the beginning of the year about cuts. We always were saying July. We were basically correct, but the Fed's slow. I don't think, uh, we're short the September Fed funds futures. So that means that we don't think there's going to be two cuts. And we've already made money on that trade, so that is attenuating. So I don't think it's going to be a big disappointment. There will be a tendency to fade that cut, but what almost no one appreciates is that when the Fed cuts rates, there's no dial in the New York Fed to lower rates. They have to inject liquidity, grow that monetary base, which I urge everybody to follow. You can do that every week. And that goes into the capital markets that bids, uh, bonds, uh, yields down and stock prices up. So should always follow liquidity. If you just did that over the last four years, you would have traded the market absolutely perfectly.
