Over the past few months, with inflation fading, Wall Street has begun a new guessing game. Instead of attempting to predict the next recession, it’s all about timing the Federal Reserve’s interest rate cuts.
In December, most experts—and investors—believed Fed Chair Jerome Powell would begin cutting rates by March. But after a string of unexpectedly strong data, Fed officials fear the economy still has to cool more for inflation to return to their 2% target and remain there, especially with two foreign wars raging.
As a result, Chair Powell was pretty clear that he doesn’t expect to cut interest rates in March at the Wednesday press conference following the Federal Open Market Committee (FOMC) meeting. “That’s probably not the most likely case or what we would call the base case,” he told reporters, adding that he is still “not declaring victory” over inflation. The S&P 500 notched its worst day of the new year as investors digested the disappointment.
Still, Albert Edwards—the often provocative, always insightful strategist at French investment bank Société Générale—argued Thursday that there could actually be a “surprise” rate cut coming. His reasoning? Trump is leading in the polls.
“Has the Fed been politicized as many now think?” Edwards queried in his latest note to clients. “If so, a surprise March cut could still be on the cards as Trump’s lead is even greater now than it was in mid-December.”
Edwards argued that the Fed won’t want to be blamed for causing a recession during a “contentious” election year, “especially if the cynics are right that they covertly favor the reelection of President Biden.”
Another ‘acerbic’ note from Edwards
This isn’t the first time Société Générale’s veteran strategist has waded into controversial territory—or even a third rail of sorts—with his analysis. Edwards, who has been labeled “acerbic” by some, has been a major establishment figure mainstreaming the heretofore progressive accusations about “greedflation” throughout the pandemic—the idea that corporations used COVID-19 and the Russia-Ukraine war as excuses to boost profits at the expense of consumers. In April of last year, he even argued that “supranormal profit margins” could “inflame social unrest” and, if unchecked, help to bring about the end of capitalism itself.
And in December, he made the case that the Fed had abandoned its “higher for longer” messaging around interest rates, not entirely owing to fading inflation, but instead because polls showed President Biden falling behind former President Donald Trump in the 2024 election. After all, higher for longer interest rates may help control inflation, but they could also spark a recession that hurts Biden’s reelection chances.
While the Fed is supposed to be an independent institution with a neutral stance, Edwards and a few other experts believe it may be a charade.
In his Thursday note, the veteran strategist described an article from one of his own “favorite market commentators,” the cofounder of investment advisory firm Variant Perception, Simon White. The piece argues that the Fed has become “politicized” and “subservient” to the roughly $34.2 trillion national debt. The idea is that the Fed can’t continue raising interest rates, because it would make the interest expenses incurred by the federal government too much of a burden—and that would hinder Biden’s chances at reelection.
Edwards also noted that the third-party candidacy of Robert F. Kennedy Jr. has made determining the outcome of the upcoming presidential election incredibly difficult, with voters who are “disgruntled” with both top candidates looking for an alternative.
“So with the outcome of the election even more uncertain than usual, what [are the] odds the Fed start easing in March and press their foot hard onto the gas pedal?” Edwards wondered aloud. He didn’t provide a definitive answer.