The stock market doesn't need rate cuts to keep setting records, economist says
monsitj/Getty Images
- The stock market doesn't need rate cuts to keep setting records, TS Lombard's chief US economist told CNBC.
- "At 3.5% to 4% inflation and 2.5% real growth, a 5.5% funds rate is okay," he said.
- Even if rate cuts this year arrive because of some weakening, the idea of a "put" on the economy would help stocks rally.
Some market pundits have pointed at the possibility of getting no rate cuts at all this year. While some are fearful that stocks will be deprived of a crucial catalyst, one expert says there's no reason to worry.
According to TS Lombard's chief US economist, markets will be able to shrug off a no-rate-cut scenario. Traders have already dramatically pared back their rate-cut expectations from the beginning of the year, when some were forecasting a total of seven.
"Really what's going on here is an evolution," Steven Blitz said in a CNBC interview on Thursday.
"At 3.5% to 4% inflation and 2.5% real growth, a 5.5% funds rate is okay," he added. "They've already told you they're not going to hike rates to try to shorten that timeline of getting to 2%, so if you're the market you're like, 'well that's okay.'"
Recently, inflation has perked up, giving investors pause on whether the economy is cooling down. The Fed's preferred gauge of inflation, the PCE index, tickered up after four months of decline, per a fresh release on Friday. Markets, however, are closed for the day.
Previously, when the Fed has started cutting rates, stocks have usually slipped into a decline, and that's because those cuts have usually occurred in light of a recession. But even if rate cuts this year arrive at the heels of some economic weakness, Blitz said the idea of the Fed stepping in to save the markets — what's called the "Fed put" — would help stocks rally.
"[The Fed] is on the side of the market," Blitz said. "If there's weakness, they'll cut. If there's no weakness they'll stay where they are. So for the market... it's kind of like a put on the economy and I think the markets are right to rally off of that."
Essentially, according to Blitz, regardless of the outcome, the case for a continuing market rally is intact.