（原标题：SFC Markets and Finance | Matthew Raskin: The Fed aims to avoid cutting rates prematurely）
南方财经全媒体记者 李依农 上海报道
As we move into the second half of 2024, financial markets are closely looking for clues on when the Fed might start cutting interest rates. Adding to the economic uncertainty is the upcoming U.S. presidential election, which could bring significant changes to fiscal and regulatory policies.
According to the latest data from the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose by 3 percent in June on an annual basis, indicating a sharper slowdown in inflation than economists had expected. It was markedly cooler than inflation’s 2022 peak of 9.1 percent. This continues the trend seen in previous months, with inflation rates gradually decreasing, further solidifying expectations of potential interest rate cuts by the Federal Reserve.
What does the inflation trend mean for the Fed's future policy decisions? How will prolonged high interest rates impact the financial markets? What is the broader economic outlook for the United States for the rest of the year? To discuss these questions, we have the pleasure of speaking with Matthew Raskin, US Head of Rates Research at Deutsche Bank.
SFC Markets and Finance: We learned that you have spent a lot of time at the Fed. Could you briefly share your experience?
Matthew Raskin: Sure. And thanks so much for having me. I joined Deutsche Bank as the head of U.S. interest rate research two years ago. And prior to that, I spent 15 years working at the Federal Reserve, particularly at the New York Fed and in the markets group of the New York Fed, which is responsible for operations to implement monetary policies such as quantitative easing, repo operations, and similar transactions in the open market.
By virtue of the relationships and expertise that come with that operational responsibility, the markets group of the New York Fed is also tasked with monitoring and analyzing global financial markets to inform the Fed's monetary policy and financial stability policies.
It was an exceptionally interesting 15 years there. I joined right as the global financial crisis was getting underway, and so was therefore part of the Fed's response to the crisis. I also experienced the Fed's initial policy normalization and interest rate hikes following the crisis, alongside managing a large balance sheet resulting from QE measures during that time. I was involved in the first round of balance sheet reduction or quantitative tightening from 2017 to 2019. Additionally, I played a role in the Fed's response to the COVID-19 pandemic.
Throughout my tenure at the Fed, I held analytical and managerial roles, culminating in advising the SOMA Manager, who oversees the Fed's portfolio management and regularly briefed the committee on financial market developments, market expectations for Fed policy, and open market operations.
SFC Markets and Finance: We can't wait to discuss the Fed with you, but first, now that we're midway through 2024, how do you see the U.S. economy? Has it achieved a “soft landing”?
Matthew Raskin: I think the economy is in very good shape, but it's probably premature to say that it has achieved a soft landing. The "landing" part of that definition refers to bringing inflation back to the Fed's 2% objective, and the "soft" part implies achieving this without a recession or a significant increase in unemployment.
The Fed has made tremendous progress, and the economy has also made significant strides in reducing inflation, now nearing the Fed's 2% target, but it's not quite there yet. I believe the Fed still has more work to do in this regard. So, in that sense, it's premature to declare that the U.S. economy has achieved a soft landing.
At the same time, the labor market remains robust, with the unemployment rate at around 4%, near historically low levels. The Fed has managed to significantly reduce inflation while maintaining a strong labor market and without a substantial increase in unemployment, which is positive. However, uncertainties persist, there's still more work for the Fed to do on inflation.
So, while I'm optimistic about the likelihood of the Fed achieving a soft landing, it might be a bit early to declare victory.
SFC Markets and Finance: Is there a risk of inflation rising again?
Matthew Raskin: I think there's always a risk of inflation rising.
Currently, it's not our baseline expectation at Deutsche Bank, as we anticipate inflation continuing to moderate and gradually moving toward the Fed's 2% target. However, there's certainly a risk that things may not unfold as expected.
The Fed has benefited from significant supply-side tailwinds in recent years, such as the recovery in global supply chains, which has brought goods inflation down (core goods inflation is actually running at a negative level here in the U.S.). Additionally, we also benefited enormously from an expansion in labor force, due to increased participation and immigration. These factors have supported the Fed in bringing inflation down.
I'm less worried about a meaningful re-acceleration in inflation from current levels, unexpected shocks are always a possibility. My greater concern is that inflation could stall or level out at uncomfortably high levels for the Fed, far from the Fed's 2% objective, rather than seeing a significant re-acceleration in inflation.
SFC Markets and Finance: As we head into the second half of the year, what are the main challenges and opportunities for the U.S. economy? Do we need to worry about the U.S. election?
Matthew Raskin: Yes, I think the second half of this year presents an exceptionally interesting and challenging environment for the U.S. economy and the Fed. I would separate this into two related but distinct areas.
On one hand, there's the economic outlook. We discussed the prospects that the Fed will achieve the soft landing, or the risks that inflation could re-accelerate. The next few months will be crucial in determining where we stand on these fronts, especially with the expectation of the first Fed rate cut toward the end of the year. The market is pricing in something a little bit sooner than that. This timing hinges largely on how inflation unfolds and whether the labor market stays resilient. I do think there's a lot of uncertainty and a lot of challenges associated with the macro economy.
At the same time, as you noted, we're only four months away from a presidential election, introducing significant uncertainty about future policies and policymakers. We're closely monitoring the potential for substantial changes in U.S. fiscal policy, although it looks like either of the candidates is probably likely to continue to run significant budget deficit, something probably above 5.5% or 6% of GDP, though the composition of those deficits I think could look quite different depending on the outcome of the election. We're also considering potential changes in trade, immigration, and regulatory policies, all of which could profoundly impact the economy, and presents both challenges and opportunities for the economy and for investors over the second half of this year.
SFC Markets and Finance: Many central banks are starting to cut interest rates, such as ECB and Bank of Canada. What does this mean for the global economy?
Matthew Raskin: I think the Bank of Canada, the ECB are responding to data and to the outlook in their jurisdictions. But I think the fact that both cut interest rates is sort of symbolic of the fact that globally, central banks are moving towards easing policy. This should mean that all else being equal, there's a bit more support for demand and growth. And this should generally benefit the global economy.
We are in an interesting environment where despite some fairly notable divergences in the economic outlooks across advanced economies, the market is pricing in quite similar synchronized policy cycles. So, if you look at the total amount of cuts priced in for the ECB, the Fed, and other major advanced economies, there's a remarkable degree of synchronicity among them.
Therefore, as we move into a world where global central banks are beginning to dial back policy restraint through interest rate cuts, this should ultimately support growth in the global economy.
SFC Markets and Finance: What impact will this have on the Fed's policy?
Matthew Raskin: Clearly there are global spillovers. But I don't see the impact of those central bank interest rate cuts as having really big effects on the Fed. To the extent that it strengthens global demand, as I mentioned, that should help support net exports in the U.S. I think there are also clearly some important financial market linkages. So, to the extent that you get more interest rate cuts from foreign central banks, that should tend to reduce longer-term interest rates globally and spill over, putting a little bit of downward pressure on U.S. interest rates. It also potentially impacts the exchange value of the dollar. These are financial conditions that matter for the Fed, but I don't think they're first-order concerns. For the Fed, it's really about what impact those might have on the outlook for domestic inflation and the domestic labor market.
I actually think the linkages and spillovers are much more pronounced going from the Fed to those other central banks than the reverse. You can see clear empirical evidence of that. If you look back at how Fed policy announcements have impacted foreign bond yields, you see very strong spillovers. This means that Fed policy not only has a big impact on U.S. interest rates and financial conditions but also spills over to affect bond yields and financial conditions globally.
SFC Markets and Finance: Isn't it unusual that the ECB and other central banks are moving faster than the Fed? What factors are holding the Fed back from cutting rates?
Matthew Raskin: Yeah, I think you're right. It's a little bit unusual for global central banks, particularly in the developed markets, to be moving ahead of the Fed. But arguably we're talking about a few months, maybe six months. So, I don't view that difference as too large. And again, if you look at what's priced in over the next couple of years, there's a remarkable degree of similarity across major central banks.
We came into this year with the market pricing a very aggressive path for Fed cuts. And they've been disappointed because the Fed has proceeded much more cautiously. And I think that really reflects two factors that are the Fed's dual mandate objectives: inflation or price stability on the one hand, and employment and the labor market on the other.
They're very keen to avoid a scenario where they cut rates and then learn after the fact that maybe inflation is a little bit more persistent, a little bit stickier than they expected, and they need to go back in and hike again. I think that, in their view, would create a lot of policy uncertainty, a lot of market volatility, and generally be a very counterproductive approach.
So on the one hand, inflation is still a bit too high for the Fed, who is looking to have more confidence that it's on a sustainable path back to 2%. This explains why the Fed is proceeding cautiously. And on the other hand, the fact that the labor market has remained strong, the fact that the unemployment rate at 4% has risen and is reflecting a cooling in the labor market, but it’s still at a low level by historical standards. And we've seen a lot of that adjustment in the labor market through other dimensions. It's come from an increase in labor supply, as I mentioned earlier, related to increases in labor force participation and immigration. And it’s come from a moderation in demand that we see in things like the number of job vacancies or job openings relative to the number of unemployed people.
I think the fact that the labor market still looks like it's fairly strong means that the Fed can afford to be cautious as they think about moving towards interest rate cuts. So, I think it's really those two factors: inflation still a bit too high, the Fed not yet confident that it's on a path to 2%, and a labor market that still looks strong.
As I mentioned before, I think the Fed is keen to avoid a scenario where they cut prematurely and find that they need to go back in and hike rates. And that means that although they've been communicating that they view the risks to their dual mandate objectives in inflation and the labor market as moving toward better balance, I still think they see the sort of loss or costs associated with a mistake as kind of asymmetrical and would prefer to ease and cut rates a little bit too late, rather than a little bit too early.
SFC Markets and Finance: What's your prediction?
Matthew Raskin: We have a first cut coming at the December FOMC meeting.
We think inflation is still going to be running a bit high for the Fed at the time of the September FOMC meeting. And then the November meeting, in our view, is a little bit too close to the US election. That meeting comes two days after the US election. But the blackout period, which is the period where the Fed can no longer communicate with markets ahead of their meetings——typically the Fed communicates their policy intentions ahead of that blackout period——that period comes into effect about a week and a half before the election.
If the Fed is cutting because of declining inflation, and not because the labor market is weakening to an unexpected degree, we think the November meeting is probably not the time that the Fed will begin. We have them starting in December. If the inflation data comes in favorably, or we see a little bit more weakness in the labor market, I think it’s possible that they could go by the September meeting. But it's not our baseline forecast.
And then we expect the Fed to cut rates quite gradually in 2025 and 2026, and back to a level for the Fed funds rate, the longer run Fed funds rate, or so-called neutral nominal rate that is around 3.5% to 3.75%. That is well above where the Fed has the longer run rate in their projections and a little bit above where you see it in market consensus.
SFC Markets and Finance: What do you think about the Fed slowing down the pace of balance sheet reduction? What impact will it have?
Matthew Raskin: The Fed at the May FOMC meeting announced a reduction in the pace of balance sheet reduction or quantitative tightening (QT), as many refer to it. And that reduced pace of QT, I think, was designed to proceed cautiously with the balance sheet. The Fed has made a lot of progress in reducing the size of the balance sheet runoff over the past two years. They have reduced their securities holdings by nearly $2 trillion over that period.
But before May, they were continuing to go at a quite rapid pace, roughly twice the pace of QT as was the case during the prior round of balance sheet runoff in 2017-2019. I think the Fed sensibly decided to slow down the pace at which they are running off the balance sheet. And the goal there is really to give the financial markets and the banking system more time to adjust to the decline in central bank reserves and broader Fed liquidity that results from the Fed's balance sheet reduction. By giving the market and the banking system more time to adjust to that balance sheet runoff, the Fed views that as reducing the likelihood that something could go wrong and force them to bring QT to a premature end. By going a little bit more slowly than they were, they could ultimately reduce the balance sheet by more than they otherwise would.
You asked about the impact on financial markets of QT. I think about that in two ways. On the one hand, on the asset side of the Fed's balance sheet, as they reduce their securities holdings, that results in more treasury securities, more agency mortgage-backed securities sitting in private portfolios. That means private investors hold more interest rate risk. As a result, they should command higher risk premium, higher term premium on those securities, and that should boost longer-term interest rates in the U.S. a bit. And it should tighten broader financial conditions somewhat.
I think a lot of those effects take place when the Fed announces its plans. If they then execute on those plans more or less in line with market expectations, I don't expect to see a big adjustment in longer-term interest rates, or broader financial conditions, as the Fed simply delivers on its plans related to balance sheet reduction. On the other hand, I think there's an important second effect related to the liability side of the Fed's balance sheet. As they reduce their securities holdings, that leads to a reduction in central bank reserves and broader Fed liquidity, and that should result in tighter funding market conditions. It should increase money market spreads in the US and globally in dollar markets a bit. It should result in a bit more volatility in dollar funding markets.
But overall, again, I think because the Fed is approaching this in a very cautious way, informed by the experience with balance sheet runoff in 2017-2019, I don't expect that we're going to see any acute stress in funding markets. I expect us to see a gradual reduction in liquidity that results in increasing volatility, widening money market spreads, but in a somewhat controlled fashion.
SFC Markets and Finance: In retrospect, how do you evaluate the Fed's massive quantitative easing during the pandemic? Was it necessary?
Matthew Raskin: I do believe that the Fed's quantitative easing (QE) during the pandemic was an essential element of both the Fed's and the government's response. With the benefit of hindsight, it appears that the QE program may have continued longer than necessary. However, I think it's helpful to back up and remember what the Fed did.
In February and March of 2020, as it became evident that the global economy would shut down due to the pandemic, there was a broad-based rush for dollar cash. This led many investors to sell their securities in order to hoard dollar cash, causing a sharp deterioration in the functioning of some financial markets. The treasury market did not function effectively, and we saw hampered risk transfer and price discovery in both the treasury market and the agency mortgage-backed securities market.
In response, the Fed stepped in and purchased substantial amounts of these securities to support market functioning. This intervention was a crucial element of their response, helping to calm financial markets. It was the right and necessary action to take.
As financial market functioning improved over time, the Fed's objectives for QE evolved and expanded. The focus extended beyond sustaining market improvements to easing broader financial conditions with the goal of stimulating demand and the economy. This objective was similar to the QE programs implemented from 2009 to 2013.
There was a clear goal of supporting the recovery. The Fed's overnight interest rate was fixed at the effective lower bound, reduced to a range of 0 to 25 basis points, which was the lowest they were willing to take it. To provide further economic support, they used QE, which was the right decision.
One might debate whether these purchases continued for too long. However, it is important to remember that in 2021, the Fed, along with many market participants, believed the inflation surge was likely to be transitory. They were dealing with high unemployment and the lingering effects of a sluggish recovery from the global financial crisis. Understandably, they aimed to continue supporting the economy through ongoing asset purchases.
These purchases extended into 2022. With hindsight, the Fed might have deemed it appropriate to wind down QE purchases a few months earlier, which could have allowed them to begin raising short-term interest rates sooner than they actually did.
SFC Markets and Finance: We’re all coming to terms with the idea that the Fed will likely keep interest rates high for longer. What does this mean for the equity and treasury markets moving forward?
Matthew Raskin: I'll start with the treasury market. To the extent that the Fed does hold its policy rate higher for longer, perhaps longer than the market is currently pricing in or than market participants expect, this should tend to push up yields across the curve. This would result in higher borrowing costs for the US government through the treasury market, as well as for households through higher mortgage rates, higher rates on auto loans, and higher credit card loan rates. It should also lead to higher corporate borrowing costs.
Regarding broader financial markets, such as the equity markets and other risk assets, the implications depend significantly on why the Fed is holding its policy rate higher for longer.
If inflation continues to gradually decrease while growth remains strong or even accelerates, and the labor market stays robust, the Fed may revise their assessment of the neutral level of the policy rate. This could create an environment where the beneficial impacts of a better growth outlook mean that capital markets, equity markets, and credit markets remain resilient and strong, despite the higher policy rate. This scenario aligns with what we have observed over the past year or so, where equity markets have been buoyant and credit spreads have stayed at historically low levels, even as the Fed has maintained a high policy rate.
Conversely, if the Fed ends up holding its policy rate higher for longer than the market expects due to persistently high inflation that may even re-accelerate, the impact on policy uncertainty and market volatility, and by extension on capital markets, equity markets, and credit markets, could be much more adverse.
Therefore, the reasons behind the Fed's decision to maintain higher rates for a longer period are crucial in determining the effects on the financial markets.
SFC Markets and Finance: What advice do you have for investors under the current economic situation? Which asset will perform better?
Matthew Raskin: As I mentioned, our forecast is that the Fed will begin to cut rates very gradually toward the end of this year, a bit later and more gradually than is currently priced into markets. I think this will put some upward pressure on broader interest rates.
At the same time, we see other factors, most notably the large fiscal budget deficits in the U.S., likely to put upward pressure on term premiums and lead to steeper yield curves, particularly at the back end of the yield curve.
The upcoming election, which might result in even bigger budget deficits and more restrictive trade and immigration policies, could further increase term premiums and steepen the long end of the curve.
In this context, we generally recommend that clients maintain a roughly neutral duration position. While we haven't delved into this in our discussion, there are some key downside risks. The labor market could weaken more than the market currently expects, which would have significant implications.
Finally, the process of winding down the Fed's balance sheet has important implications for global dollar funding markets. We should generally see tighter liquidity conditions affecting financial markets. However, as noted, we don't expect to see significant stress related to this.
（This interview was conducted in early July. The interviewee's latest views may have changed based on new data and developments.）
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责任编辑：李依农
记者：李依农
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