Macro

Rokos Exec Doubts Fed Cuts in '24, Cites 4.1% CPI Challenge

Rokos Executive Doubts 2024 Fed Rate Cuts Amid Election, Inflation; Powell Advocates Cautious, Data-Dependent Approach

By Mackenzie Crow

5/16, 08:31 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
article-main-img

Key Takeaway

  • Rokos Capital's Richard Tang sees Fed rate cuts in 2024 as unlikely, citing unpredictable inflation and the upcoming presidential election.
  • Market expectations of two rate cuts clash with Tang's view, amidst political and policy uncertainties affecting monetary forecasting.
  • Despite benign recent CPI data, six-month trailing CPI remains high at 4.1%, complicating the Fed's path to its 2% inflation target.

Fed's Cautious Stance Amid Inflation Uncertainty

Richard Tang from Rokos Capital Management highlighted the challenges in forecasting inflation, especially with the upcoming presidential election influencing policy implications. Despite market expectations, Tang believes it's unlikely the Federal Reserve will cut rates this year, citing the election's impact and the current inflation rate, which remains above the Fed's target. This view is supported by Fed Chair Jerome Powell's recent comments, emphasizing a cautious approach to interest rate adjustments due to unexpectedly high inflation readings.

Inflation Dynamics and Policy Implications

The persistence of inflation, with the six-month trailing CPI still around 4.1%, complicates the Fed's policy path. Both Tang and Citadel founder Ken Griffin pointed out that regardless of the election outcome, federal spending is likely to remain high, posing challenges to reducing inflation. Powell's acknowledgment of the slow progress in controlling inflation underlines the Fed's predicament, with the central bank maintaining interest rates at a 23-year high to combat inflationary pressures.

Economic Models and Market Predictions

Tang criticized the reliance on conventional econometric models for predicting inflation, suggesting that the current economic regime has rendered these models less applicable. This sentiment is echoed by Powell's admission of the unpredictability of inflation's trajectory and the need for a patient, data-dependent approach. The Fed's strategy focuses on balancing demand growth with supply capabilities, aiming to cool the labor market and ease inflation without causing significant economic downturns.

Street Views

  • Richard Tang, Rokos Capital Management (Neutral on Federal Reserve policy):

    "It’s unlikely that the Fed will be able to cut this year... once we get through all of this, it’s pretty much a 50-50 bet whether it’s an ease or a hike at the next meeting." "Central banks have become addicted to giving forward guidance and forecasting has become treacherous for monetary policy decision makers." "While Wednesday’s US CPI data appeared more benign, six-month trailing CPI is still close to 4.1%, a way from the Fed's target of 2%."