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Rate cuts: More evidence of lower inflation is needed before cutting rates, says Fed's Mester

Yahoo Finance2024-03-01
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💫 Short Summary

Federal Reserve President Mester predicts three rate cuts this year, aiming for 3-4 cuts by year-end to address inflation concerns. There is caution about the impact on financial conditions post-cuts. The correlation between inflation, FED funds rate, and yields is discussed, with expectations of downward pressure on yields. Despite record corporate debt issuance, credit remains expensive relative to yields. The speaker advises patience for a better entry point and suggests seizing opportunities in T-bills for passive income. Overall, a strategic approach is recommended to navigate potential market changes and capitalize on falling yields.

✨ Highlights
📊 Transcript
Federal Reserve President Loretta Mester predicts three rate cuts this year based on the need for more evidence and data to confirm inflation is cooperating.
00:10
The current policy rate is considered restrictive to cool demand and lower inflation, prompting a cautious approach by the Fed.
Despite concerns raised by Larry Summers, the Fed is expected to proceed with rate cuts around summertime, aiming for around 3-4 cuts by year-end.
Financial conditions may remain tight even after rate cuts, but overall progress is anticipated over the next 6-12 months.
Correlation between inflation, FED funds rate, and yields.
03:35
Predicts downward pressure on yields as FED funds rate aligns with inflation.
Anticipates periodic upward moves due to concerns about budget deficits and treasury issuance.
Overall trend expected to be lower yields throughout the year.
Front end of the yield curve, especially T-bills, seen as compelling for passive income seekers.
Discussion on record issuance of corporate debt in January and February without upward pressure on spreads.
05:21
Credit still seen as expensive on a relative basis, despite attractive absolute yields.
Speaker advises patience for a more attractive entry point on a relative basis, waiting for spreads to reflect expected economic growth.
Spread levels below average, potential return to average levels in line with current economic outlook.
Current compensation levels deemed insufficient by the speaker.