According to Sheila Bair, former FDIC chair, market optimism about possible interest rate cuts next year is dangerously overblown.
Bair, who led the FDIC during the 2008 financial crisis, suggested that Federal Reserve Chairman Jerome Powell took an irresponsibly dovish stance at last week's monetary policy meeting by inspiring “irrational exuberance” among investors.
“The focus needs to continue to be on inflation,” Bair told CNBC’s “Fast Money” on Thursday. “There is still a long way to go in this fight. I’m already worried.” [the Fed] I'm squinting a little and now trying to turn around and worry about a recession, even though I can't see any risk of that sort in the data so far.
After keeping interest rates stable for the third straight day on Wednesday, the Fed expects at least three rate cuts next year totaling 75 basis points. And the markets ran with it.
The Dow hit all-time highs in the final three days of last week. The blue-chip index is on its longest weekly winning streak since 2019, while the S&P 500 is on its longest weekly winning streak since 2017. It is now 115% above its Covid-19 pandemic low.
Bair said she believes the market's bullish reaction to the Fed is on borrowed time.
“This is a mistake. I think they need to keep an eye on inflation and tame the market instead of amplifying it with this… dovish dot plot,” Bair said. “My concern is the prospect of a significant reduction in tariffs in 2024.”
Bair still sees service and rental prices as serious issues. Additionally, it fears that deficit spending, trade restrictions and an aging population will also lead to significant inflationary pressures.
“[Rates] should stay. We have good trend lines. “We have to be patient and watch how this develops,” Bair said.
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