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British fund manager abdrn recently forecasted a soft landing for the U.S. economy, but there are concerns about a prolonged slowdown in 2025. Kenneth Akintewe, the company’s head of Asian sovereign debt, raised the question of whether the Federal Reserve is making a policy mistake by potentially overlooking signs of weakness in the economy.
Akintewe pointed to troubling economic data, such as the recent revision of non-farm payrolls which revealed that the U.S. economy created 818,000 fewer jobs than originally reported between April 2023 and March 2024. This suggests that the economy may be weaker than what the headline data suggests, prompting discussions about the need for easing from the Fed.
The process of implementing policy changes through the economy takes time, and Akintewe emphasized that if the economy is indeed weaker than expected, the Fed may need to accumulate a significant amount of easing over time. This could result in a slower transmission of any supportive measures, potentially not being fully felt until the second half of 2025.
Furthermore, Akintewe questioned why the policy rate is still relatively high at 5.5% when inflation is much lower at around 2.5%. With uncertainty looming, he challenged the notion of maintaining a 300 basis point real policy rate in the current economic environment.
Looking ahead, data on the personal consumption expenditures (PCE) price index suggests a smaller rate cut in the near future, with U.S. rate futures indicating a higher likelihood of a 25-basis-point cut at the upcoming Fed meeting. The market currently anticipates a 70% chance of a smaller rate cut, while the remaining 30% expects a more substantial reduction of 50 basis points.
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