Federal Reserve rate cut expectations have been pushed back by several major banks, tempering the market’s hopes for a June interest rate reduction. Eddie Ghabour, Co-Founder and CEO of Key Advisors Wealth Management, joins Yahoo Finance to share his perspective on why he believes a Fed rate cut may not be the right move for markets at this time.
Ghabour expects the Federal Reserve is more likely to implement a single rate cut by September, rather than the earlier June timeline that some investors had been anticipating. While he acknowledges that a rate cut “may be perceived as bullish initially,” Ghabour argues that such a move right now would be “the biggest mistake” the central bank could make for the markets.
Pointing to the bond market, Ghabour notes that it is signaling that inflation remains “a big problem.” He contends that a Fed rate cut at the current stage would be inflationary and “counterintuitive to what they’re trying to do,” which is to bring rates down to the 2% target. Ghabour warns that a premature rate cut could spark a renewed acceleration in the economy, potentially defeating the central bank’s efforts to curb inflation.
“Doing nothing here for the rest of this year and going into next year gives us our best opportunity for success. Anything other than that, I think, is gonna be a big problem.” Ghabour tells Yahoo Finance.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance.
This post was written by Angel Smith
Video Transcript
MADISON MILLS: Seeing a mixed picture from stocks this morning. But we are starting to see them trading to the upside here, despite investors pushing back their rate cut expectations, pricing in that first cut in September with dwindling odds of a second rate cut coming this year.
And while most investors are eagerly awaiting that first rate cut to take place, our next guest is not. For more on this, we are joined by Eddie Ghabour, Key Advisors Wealth Management co-founder and co-CEO.
Eddie, thank you so much for joining us. I want to start with your base case here. What are you anticipating?
EDDIE GHABOUR: So I do think the Fed will, ultimately, cut rates one time by September. I don’t think they’ll do it in June, maybe, July. But as you stated earlier, I think a rate cut, although, it will be perceived as bullish, initially, and you’ll see the markets more than likely rip on that news, I think that’s the biggest mistake they can make.
It’ll be a repeat of what we saw in the late ’70s, because the big problem that we’re dealing with right now is inflation. And the bond market is telling us right now that there’s a problem, meaning, that we are not close to where they’re trying to get to that 2% number.
So if they cut rates, that’s, actually, inflationary. It’s counterintuitive to what they’re trying to do. So if they cut rates, our biggest concern is, we will see a major re-acceleration of inflation in the latter part of this year, when you just look at the base effects and compare it to oil on a year-over-year basis plus the inflation the cuts would cause, now, you’re looking at 2025, a cycle where they may have to come in and kill the economy and the markets by raising rates.
The bottom line is, right now, the economy doesn’t need stimulus. All the data supports that. So I think the markets are just having a correction right now to reassess the interest rate environment. But the markets can hold up just fine with no rate cuts.
So, again, if they do make cuts, it’ll look good early on. But I think it’s going to be a major problem and headwind heading into next year, because they’ll be having to raise rates, which that’s the last thing they want to do.
SEANA SMITH: Would they even have to be talking about raising rates before the end of this year? It’s a contrarian view, Eddie. But when you talk about the fact that there’s lots to be concerned about when you look at the inflationary trends, when you look at the fact that the labor market remains so resilient at this point, should that be something that should be more within the discussion?
EDDIE GHABOUR: I think it’s on the table. But if you look at what the bond market has done in regards to the 10-year, really, up substantially, I would say the bond market’s doing the tightening for them. So, although, rate hikes are, potentially, on the table for this year and could be part of the conversation, I really don’t think they’ll have to because the bond market will do the work for them.
The cost of capital is going up. You’re starting to see some real estate starting to impact real estate. So the bond market’s doing their job for them. And that’s the beauty of the capital markets. And when you come in and try to disrupt what the capital markets are doing, that’s when you have these gyrations.
So doing nothing here for the rest of this year and going into next year gives us our best opportunity for success. Anything other than that, I think, it’s going to be a big problem.
MADISON MILLS: Eddie, let’s stick on that point, because it’s just fun to disagree on stuff. If 2/3 of the economy is made up of consumer spending, what impact does the bond market have on that? Particularly, when you have so many consumers putting things on credit, using buy now, pay later, and also with record breaking high yield savings accounts and dividend plays, there’s so much capital and liquidity out there for the consumer.
EDDIE GHABOUR: So look, high rates right now, I would say, are favorable for people that have money in savings. Because for the first time in over a decade, they’re, actually, getting paid to have money in savings and money markets that are yielding. Many of them are yielding over 5%. So that’s extra cash in the consumer’s pocket.
Look, at the end of the day, this zero interest rate policy that we had for such a long period of time caused people to get over their skis in debt. And I think the consumer is going to get weaker. And rate cuts aren’t going to solve any problems in regards to that.
Economic cycles, if we just let them run their course and let the capital markets do what they’ll do without trying to interfere anytime there seems to be any headwinds, again, I think, it’s best to let the markets take care of themselves.
But look, I think these higher rates are going to be a problem for the consumer. But, again, you could see an environment where the Fed cuts rates. But if the bond market doesn’t go any lower, the cost of capital is still going to stay high. And that’s something that I think we’re going to have to deal with.
This is the new normal. I don’t think inflation is getting down to 2% anytime soon. Just look at what people are paying for food and gas. That’s the real cost that everyday people and families are having to deal with. And I don’t see a catalyst that the Fed can do to bring that down.
The only thing that brings that down is a slowing of the economy. And you can keep it slowing down at a manageable pace, if you keep rates right where they are.
SEANA SMITH: And the Fed, usually, strips out the volatile energy prices because of exactly what we’re seeing play out right now. But, Eddie, let’s talk about what this means for the investor out there. If you’re trying to position yourself, you’re saying that, hey, it doesn’t really matter for the markets. The market can still trend higher, regardless, of what the Fed does next.
How then should investors be positioned for that move to the upside?
EDDIE GHABOUR: Well, I’ll share with you what we did. So we have, obviously, getting a reset here. We sold about a third of our equities in our tactical strategies on Monday morning during the rally, because we do think we’re having a reset right now of the realization that we’re not going to be having rates lowered substantially, or maybe even at all.
So right now, we are taking a cautious stance, because we think this sell off could accelerate. And if they go after names like NVIDIA, like the other names, then you could really see a double digit correction here.
I want to stress that I think this correction is going to be extremely buyable. We plan to buy them. Because at the end of the day, the economy is accelerating. Earnings, for the most part, are actually fine. This is just a normal correction that we have to go through and basically resetting to new rates.
So I believe, over the next four to maybe six weeks, you’ll have some amazing buying opportunities, maybe sooner than that. But I would take a cautious stance right now because the tech sector was over. Its skis in regards to how high it went. And we will be buying them again. But we’re not ready to buy today.
I think there’s still downward pressure. And then you have the Middle East issue that I think will have to wait a couple of two to three weeks to see what type of retaliation, if any. And that would certainly add fuel to the sell off.
SEANA SMITH: All right. Eddie Ghabour, great to have your insight here, Key Advisors Wealth management co-founder and CEO. Thanks.