The gloves are off for Kumal Sri-Kumar when it comes to his view of where Fed Chair Jay Powell has led the Federal Reserve. He says that the Fed’s bloated balance sheet combined with the federal government’s massive fiscal stimulus are still helping to fuel the U.S. economy and keeping upward pressure on inflation. On top of this, he says inflation is set to move higher in the second half of 2024 as year-over-year comparisons are set to be another roadblock to Fed rate cuts.
Sri-Kumar says “the Fed is itching to cut rates,” but it with inflation likely to still be well above its 2% target by November, the Fed will not want to cut rates because “they will be in the same position as (former Fed chair) Arthur Burns during much of the 1970’s, cutting rates and then a couple of years later, having to increase rates again.”
He says the Fed has made a mistake by slowing down the pace of QT, Quantitative Tightening, the process where it stops buying bonds, which it was purchasing during the pandemic to fuel growth and keep the bond market liquid and stable. Instead, he says if Fed officials are “serious” about reducing their balance sheet (which can be another form of credit tightening) they should have increased QT rather reduce it.
So why hasn’t the Fed done this? Sri-Kumar says the Fed is afraid of a repeat of September 2019 money markets froze up. And “afraid of a repeat of March 2023 when a number of smaller banks failed. And they are afraid of the commercial real estate market which is a time bomb waiting to explode.”
”That’s why I look for a hard landing which will eventually bring inflation down,” he adds.
Might the Fed start cutting rates in order to help the federal government finance it big budget deficit? On the one hand Sri-Kumar acknowledges that the Biden administration has said repeatedly that it will not interfere in monetary policy. But he observes that recently when Japan’s prime minister was visiting the White House President Biden at a press conference predicted that there will be a rate cut before the end of 2024.
”Now what is (that) than essentially giving a signal to the Fed on what the President would want to happen?”
But, Sri-Kumar adds, the Fed will be unable to do it, because if it does consumer spending will surge, there will be a bond and stock market rally, and this will push inflation up “so that’s the box they are in.”
As for banks, he says the shaky ground so many are on now, holding unrealized losses on their books, is due in large part to and the Fed’s messaging that inflation would be transitory, and this bears a big part of the blame for the situation small regional banks, who are big investors in now very shaky commercial real estate, are in now. In fact he says he expects some kind of “credit event” to what ultimately forces the Fed to cut rates and to bring down inflation.
Oh, and how about one six-year term for future Fed chairs instead of multiple four-year stints? Sri-Kumar is advocating for this too.
As for his authority on all of these matters, let’s look at his background.
On the academic side Sri-Kumar holds an M.A. in Economics from the Delhi School of Economics, and M.Phil and Ph.D. degrees from Columbia University. His doctoral dissertation at Columbia University was supervised by Robert Mundell, Nobel Laureate in Economics and he told me Stanford’s John “Taylor Rule” Taylor was also on his advisory committee. So he has studied this stuff a lot.
As for his professional experience, he is President, Sri-Kumar Global Strategies,
a macroeconomic consulting firm he formed in January 2013 to advise multinational firms and sovereign wealth funds on global risk and opportunities. Prior to founding the firm, Sri worked at Trust Company of the West (TCW) from 1990 to 2012, serving for the last several years as the firm’s Chief Global Strategist.
Before his work at TCW, Sri was Senior Vice President at the Beverly Hills-based Drexel Burnham Lambert, and Executive Vice President of DBL Americas, specializing in country risk analysis.
So sit back and hear, see what he has to say. Agree or disagree he will give you something to ponder. And do let me let me know what you think.
And let Sri know too! When you finish here go visit his Subtack:
In fact, he is warning that a “credit event” of some kind will finally hiy
Sri-Kumar: "Hard Landing" Will Bring U.S. Inflation Down