Will the Fed Lower This Year?
John Lekas – CEO and Senior Portfolio Manager
August 20th, 2024
Currently, the United States’ debt-to-GDP ratio is approximately 143%, while China’s is approximately 297%. As the national debt for the U.S. and China reaches these levels, it becomes a race to the bottom for currencies because we cannot pay off our debt. The Federal Reserve would be lowering rates, however, it’s an election year, and the incumbents know that despite the deficit, cutting rates could drive the dollar into a free fall and, hence, gasoline to $7.00 a gallon, along with price increases for groceries and other commodities.
Therefore, we believe that the maximum rate cut this year will be 0.25%. Ultimately, the United States will move to a “polite default” and cut rates significantly (devalue our currency), not to stave off a recession, but to try and export our way to a more positive GDP and pay off debt with cheap dollars.
We believe lowering rates will trigger foreign buyers to sell treasuries as their investment is eroded by a falling dollar. Hence, long rates may rise. It is a conundrum, but when you have been this reckless with Fiscal Policy, this is the result, and there is no easy way out. The only way is through a weaker dollar, which will shift from wage to price inflation (meaning commodity prices will rise). In our view, we will not enter a recession in 2024 or 2025. Inflation and exports will drive the economy and equity markets higher
*Source: Bloomberg
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