Careless rate cuts are a big recession risk for US: Strategist

JPMorgan Asset Management chief global strategist David Kelly joins Julie Hyman and Akiko Fujita at the Future Proof Festival to discuss the state of the US economy as the Federal Reserve is expected to make its first interest rate cut in four years this week. Kelly calls the current economy "healthy," explaining, "the unemployment rate is at 4.2%, the CPI [Consumer Price Index] inflation rate 2.5%. You add those two numbers together, 6.7 — that is lower than it's been 84% of the time over the last 50 years. So I think the Federal Reserve really shouldn't have too much angst about this," he tells Yahoo Finance. He argues that the Fed shouldn't have pushed rates as high as they did and should have initiated cuts earlier. However, he explains that if Fed officials cut aggressively from here on out, they runs the risk of undermining investor confidence as it could signal that the economy is worse off than expected. "It's kinda like lowering a piano down from the fourth floor of a building. You got to do it slowly and carefully because the biggest risk is that you freak people out." If the Fed sparks recession fears by cutting rates too aggressively, Kelly believes that it could cause a ripple effect that impacts everything from hiring to the housing market. While lower rates will stimulate the economy, he warns, "the first few moves actually hurt the economy, not help it. That's why the Federal Reserve has such a hard time cutting rates and actually having it help the economy because it actually hurts before it helps." Kelly views the Fed moving too dramatically as the "biggest known risk" for the US at this point in time. He points to pivotal events like September 11 and the COVID-19 pandemic which have contributed to recessions in the past. "I think people are worried about recession, but in the end, you've gotta gimme a reason why consumers stop spending, and I think it takes a lot to make American consumers stop spending." With the 2024 presidential election on the horizon, Kelly believes that the United States's debt isn't a cause for concern: "We absolutely need to deal with it, but what we've seen is the world has got a tremendous appetite for US debt. Last year, the Fed, the Treasury Department managed to raise $2.7 trillion of additional debt. And long-term interest rates didn't even go up. And so if they can do that, I think that we can actually handle big deficits for a while." Instead, Kelly worries about a potential trade war as both Democrats and Republicans have embraced tariffs. "Tariffs are terrible economic policy. They are a magical stagflation elixir. There are very few things that can actually cause the economy to slow and push up inflation at the same time. And tariffs can do that," he warns, noting that the policy could land the US in a recession. Following the Trump administration's trade war with China, Kelly notes that the US has moved away from globalization.
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[SarahGonzales-sktn]

This global recession/collapse might end up being a part of us for a very long time. With inflation currently at about 3%, my primary concern is how to maximize my savings/retirement fund of about $680k which has been sitting duck since forever with zero to no gains.

[cloudthefaun]

i wanna say something... we are in a silent recession... i have tons of evidence on why the unemployment rate is wrong ... right now .... in the U.S the unemployment rate is up by 9.7 percent ... also counting people who gave up on searching for jobs and are also unemployed

[andybuchanan]

This line of thinking is... completely silly and that's putting it charitably. Classic causation vs correlation mistake. The reason 50 bp cuts have often preceded bad events is because they do it when they need to cut quickly - it doesn't cause that event.

Why did nobody say that raising 75 bps might actually make the inflation panic worse and therefore drive up inflation? That would be the same bad logic.

[Rhadoo]

If you only measure the economy by the amount of dollars spent, then yes, it's doing great.
But that's just because prices are way higher, not because there's a lot more goods and services being created/offered.
Measuring GDP in dollars doesn't really tell you much about the underlying economy. Just that a lot of money was spent. And a lot of that money was obtained through debt.

[yw]

Wan't JP Morgan stock down by 10% last week becuase of the expectation of falling interest rate? Why do we want to push their narratives on the interest rate?

[TomEdwardi]

I recently sold some of my long-term position and currently sitting on about 250k, do you think Nvidia is a good buy right now or I have I missed out on a crucial buy period, any good stock recommendation on great performing stocks or Crypto will be appreciated

[populistprogressivenewswit]

Yeah we should believe anything JPMorgan Chase says with their wonderful history. Is he mad at Federal interest rates might go down and they can't use that as a justification to price gouge?

[johnrental]

He just doesn't want his cd rates to go down.

[Gabber]

How can this guy say the economy is doing ok? No one has any money! Housing unaffordable, labor sinking now a .50 signals recession.

[bobbyward]

Take out government transfers and we are in one he'll of a weak economy. The strength of the economy can't be contingent on government spending

[mandyyonge]

As a soon retiree, keeping my $401k on course after a rocky 2022 is top priority. I have been reading of lnvestors making up to $25Ok R0I in this current crashing market, any recommendations to scale up my R0I before retirement will be highly appreciated