What signal? After the Fed rate cut, many "big shots" warn of the risk of inflation rebound!

Jason Thomas, Global Head of Research and Investment Strategy at KKR, urges investors to prepare for a potential inflation rebound, which will force Federal Reserve officials to converge interest rates to 4.5%. Thomas pointed out that interest rates are still "too high" and expects the Fed to cut rates by half a percentage point this week and at least two more times thereafter. However, with industries stagnating due to high borrowing costs, Thomas noted the risk of price pressures re-emerging in the world's top economy. He stated on Thursday that fund managers may have to accept that a benchmark rate of 4% to 4.5% is the "new normal." Following Thursday's Fed policy meeting, the federal funds rate target range is 4.75% to 5%. He added, "There will definitely be more rate cuts, but I doubt the extent of rate cuts will be as small as implied by futures and yield curves." Traders expect the Fed to cut rates by about 70 basis points by the end of the year, which is more aggressive than the Fed's forecast of a 50 basis point cut in 2024 as indicated in the so-called "dot plot." Thomas said, "If you think we will return to 2019 interest rate levels, you need to ignore the scale of changes observed since then." Meanwhile, former Kansas City Fed President Hoenig also said on Thursday that the Fed's decision to cut rates by half a percentage point leaves room for the risk of inflation resurgence. "They are betting that they have already controlled inflation," Hoenig said at the Reuters Global Markets Forum. "They have shifted their focus to maintaining employment, which does increase the risk of future inflation outbreaks." The Fed launched its easing cycle on Thursday, the first rate cut since 2020, citing "greater confidence in inflation moving towards the Fed's 2% target" as it now focuses on maintaining a healthy labor market. Hoenig noted that the significant rate cut by the Fed has also put pressure on the already weakening U.S. dollar, having served as Kansas City Fed President from 1991 to 2011. The dollar has weakened since July and has now fallen to levels not seen since December 2023, amid growing concerns that the Fed's aggressive easing stance could undermine its strong global position. Hoenig stated that dollar depreciation will lead to higher import costs and stimulate overseas demand for U.S. goods, both of which will exacerbate inflationary pressures. In addition to a series of policies aimed at "promoting growth," the U.S. government plans to borrow at least $2 trillion in new debt to cover the budget deficit. Refinancing short-term loans may also push up rates. Hoenig suggested that to avoid this scenario, the Fed may halt balance sheet reduction and even consider restarting efforts to inject funds into the economy in the form of quantitative easing. He said: "This is a risk for the next six to nine months, but it's a real risk that no one is paying attention to, and I'm closely monitoring it."