The British fund manager abdrn has expressed concerns about the U.S. economic outlook, predicting a potential soft landing but warning of the risk of a prolonged slowdown in 2025. This warning comes from Kenneth Akintewe, the company’s head of Asian sovereign debt, who questioned whether the Federal Reserve (Fed) is already making a policy mistake by not taking preemptive action.
Akintewe highlighted the issue of unreliable economic data, specifically citing the later revisions to the non-farm payrolls numbers. The U.S. Labor Department reported that the economy created significantly fewer jobs than originally stated from April 2023 to March 2024. This discrepancy indicates that the economy might be weaker than the headline data suggests, raising questions about the accuracy of official reports.
The Need for Easing
In response to the potential economic weakness, Akintewe suggested that the Fed should consider implementing policy adjustments to provide stimulus to the economy. He argued that if the economy is indeed weaker than reported, the Fed would need to accumulate a sufficient amount of easing, possibly up to 200 basis points, to have a significant impact. However, he also noted that any policy changes by the Fed would take time to transmit through the economy, potentially delaying the effects of any easing measures.
Akintewe criticized the market’s fixation on predicting the size of any potential rate cuts, pointing out that the policy rate is still relatively high at 5.5% despite inflation being around 2.5%. He questioned the necessity of maintaining a 300 basis point real policy rate in the current economic environment characterized by uncertainty. This discrepancy between the policy rate and inflation rate suggests a disconnect that could potentially hinder economic growth.
Implications for the Fed’s Decision
The recent data on personal consumption expenditures (PCE) price index showing a modest increase in inflation might influence the Fed’s decision on future rate cuts. Market expectations currently lean towards a 25-basis-point cut at the upcoming Fed meeting, with a smaller chance of a 50-basis-point cut. This suggests that the market is anticipating a more conservative approach from the Fed, possibly in response to the slight uptick in inflation numbers.
The warnings from abdrn’s Kenneth Akintewe highlight the potential risks of a prolonged economic slowdown in 2025. The uncertainty in economic data accuracy, the need for proactive easing measures, and the discrepancy between policy rates and inflation all point towards a complex economic landscape that requires careful navigation. The Fed’s upcoming decisions will play a crucial role in shaping the future economic trajectory, with implications that extend beyond the immediate term.