High bar for Fed to want to cut rates this year, says economist Jason Furman

Jason Furman, Fmr. Council of Economic Advisers chairman, joins 'Closing Bell Overtime' to talk the impact tariff uncertainty and inflation risk is having on the market.

[@miloatlantis2549]

his points about immigration is spot on. Things will probably get worse with job loss with all the deportations, tariffs and govt cost cutting.

[@erichvonmolder9310]

How can you cut rates with what Trump is doing? I do not see any cuts this year and possibly next year the way Trump is going.

[@Vlad-qu5mt]

Could the Fed Start Quantitative Easing (QE) Before Cutting Rates?
Your point about the Fed potentially using quantitative easing (QE) before cutting rates is an interesting one, especially considering geopolitical dynamics and the Fed’s dual mandate (inflation & employment). Here’s how this scenario could unfold:
1. The Case for QE Before Rate Cuts
"Higher for Longer" Aligns with U.S. Geopolitical Goals
Keeping rates high strengthens the U.S. dollar, making it more attractive for global investors.
A stronger dollar increases purchasing power for U.S. imports while weakening foreign currencies, which can put economic pressure on geopolitical rivals (e.g., China, Russia).
Higher rates also ensure inflation expectations remain anchored, preventing a resurgence of price pressures.
Fed Could Use QE as a Liquidity Tool While Keeping Rates Elevated
Instead of cutting rates immediately, the Fed might reintroduce QE or adjust its balance sheet runoff (quantitative tightening, QT) to inject liquidity into the system.
This would allow financial conditions to ease selectively (helping credit markets, banks, and the Treasury) without losing the geopolitical and inflationary benefits of high rates.
A "QE-lite" approach-such as slowing the pace of balance sheet runoff-could serve as a compromise before rate cuts.
Financial System Stability as a Justification
If stress emerges in the Treasury market, banking sector, or credit markets, the Fed could use QE to stabilize liquidity without prematurely cutting rates.
The Fed could justify QE by citing financial stability concerns, not necessarily a pivot toward rate cuts.
2. Timeline & Scenario Analysis
Scenario 1: Inflation at 2.2% by Mid-Year → Rate Cuts Begin
If inflation cools close to 2% by June, the Fed is likely to cut rates directly, avoiding the need for QE.
First cut in June or September, followed by one or two more by year-end.
Scenario 2: Sticky Inflation (>2.5% in Mid-Year) → QE Before Rate Cuts
If inflation is still above 2.5%, the Fed may hold rates steady longer to maintain a strong dollar and continue restraining inflation.
However, the Fed could pause quantitative tightening (QT) or reintroduce limited QE in Q2 or Q3 to ease liquidity concerns before cutting rates.
Rate cuts would be delayed until Q3 or Q4, potentially followed by two quick cuts before year-end.
Scenario 3: Geopolitical & Fiscal Considerations → Delayed Rate Cuts, QE to Manage Liquidity
With elevated U.S. deficits, the Treasury needs strong demand for bonds to finance government spending.
QE could support liquidity in the bond market while the Fed holds rates higher for geopolitical and inflation-fighting purposes.
This could result in a late-year rate cut cycle (starting in Q4 or even early 2025).
3. Strategic Implications
Market Impact
If the Fed signals a willingness to pause QT or engage in limited QE before cutting rates, markets may front-run looser conditions.
Equities and risk assets could rally, even before the first rate cut.
The bond market could stabilize, easing funding costs for the Treasury.
Geopolitical & Dollar Strength Strategy
Keeping rates higher for longer until mid-year allows the U.S. to maintain dollar strength, pressuring rival economies with weaker currencies.
Then, a controlled liquidity injection (QE or balance sheet adjustments) could ensure U.S. financial stability before the first official rate cut.
Conclusion: A "QE Pause" Before Rate Cuts is Plausible
The Fed may delay rate cuts until late 2024, but use balance sheet management (pausing QT or targeted QE) to ease financial conditions selectively.
This would allow the Fed to maintain a strong dollar and geopolitical advantage while still supporting U.S. markets.
The first rate cut could happen in Q3 or Q4, with two quick cuts before year-end if inflation cooperates.
Would you like a real-time check on market expectations for Fed policy? I can look up current Fed Funds futures pricing and QE probabilities.
chatgpt.com/share/67a4a244-6e04-8006-ac83-23cecd81a1d9
chatgpt.com/share/67a60264-d244-8006-846e-c6677d641d9c
geopolitical concerns:
1. Housing Real Estate Crisis Hits China
China's real estate sector has been a significant driver of its economic growth. However, aggressive expansion by property developers, fueled by readily available low-interest loans from state-owned banks, led to an oversupply in the housing market. As demand waned, developers found themselves overleveraged, triggering a crisis in the sector.
HEDGEPOINTGLOBAL.COM
2. Need to Lower Rates to Bail Out Developers
In response to the crisis, the Chinese government considered monetary easing to provide relief to struggling developers. By lowering interest rates, the aim was to reduce borrowing costs, stimulate demand, and offer financial reprieve to indebted companies.
HEDGEPOINTGLOBAL.COM
3. Lower Rates Mean People Can't Get Good Returns for Retirement
While lower interest rates can stimulate economic activity, they also result in reduced yields on savings and fixed-income investments. This scenario poses challenges for individuals, especially retirees, who rely on interest-bearing assets for income, prompting them to seek higher returns elsewhere.
4. Capital Flees into US Safety: Gold, Crypto, Stocks, But Not Bonds Due to Inflation and Tariffs
Facing diminished returns domestically, Chinese investors may look abroad for better opportunities. The U.S., with its relatively stable economic environment, becomes an attractive destination. Assets like gold and cryptocurrencies are appealing as hedges against domestic instability and potential currency depreciation. However, U.S. bonds might be less attractive due to concerns over inflation eroding real returns and uncertainties stemming from trade tensions and tariffs.
FT.COM
5. Dollar Strengthens but No Demand for Treasuries While China Stops Buying and Even Dumps
The influx of foreign capital into U.S. assets increases demand for the dollar, leading to its appreciation. Concurrently, if China reduces or halts its purchases of U.S. Treasuries-or begins selling them-the demand for these securities declines. This reduction can be attributed to China's need to repatriate capital to support its domestic economy or as a strategic response to geopolitical tensions.
FT.COM
6. Strong Dollar Exacerbates Margin Problems at Home, and the Bond Market Is Needed for Liquidity
A strengthening dollar can have mixed effects. Domestically, it can lead to challenges for exporters as U.S. goods become more expensive abroad, potentially squeezing profit margins. Internationally, countries with debts denominated in dollars may find it more expensive to service these obligations, leading to liquidity strains. In such scenarios, the U.S. bond market plays a crucial role in providing liquidity, but reduced demand-stemming from factors mentioned earlier-can impair its effectiveness.
BIS.ORG
7. Changing the Central Rate Won't Help
Adjusting central bank policy rates might have limited effectiveness in this context. While rate cuts can stimulate domestic borrowing and spending, they may not address the underlying issues of capital flight, currency valuation pressures, and external demand dynamics.
8. Reaction Through QE or QT as Appropriate Tools
To manage these complex challenges, central banks might resort to unconventional monetary policies:
Quantitative Easing (QE): By purchasing long-term securities, central banks can inject liquidity into the financial system, lower long-term interest rates, and encourage investment. This approach can support asset prices and provide banks with additional capital to lend.
Quantitative Tightening (QT): Conversely, by selling assets or allowing them to mature without reinvestment, central banks can withdraw liquidity from the system, potentially cooling an overheating economy or addressing asset bubbles.
The choice between QE and QT depends on the prevailing economic conditions and policy objectives. Given the scenario you've outlined, QE might be employed to bolster liquidity and support the bond market, while QT could be considered if there are concerns about excessive inflation or asset bubbles.