Former Vice Chairman of the Federal Reserve: "It is indeed possible" to cut interest rates three times this year

Richard Clarida, who served as Vice Chairman of the Federal Reserve from 2018 to 2022, believes that with declining inflation and a cooling labor market, the Fed may cut interest rates three times this year.

Currently serving as the global economic advisor for asset management giant Pimco, Clarida said in an interview that further improvement in U.S. inflation data and an increase in the unemployment rate will guide the Fed's decisions.

He stated that Pimco's forecast is for the Fed to cut interest rates twice this year, with "the possibility of a third rate cut."

He added, "Since May, both inflation and employment data have been very favorable for the Fed. In the past three months, the inflation rate is running around 2% again, and the labor market has become more balanced."

Clarida noted that as inflation approaches the target level, the Fed has begun to pay more attention to employment data.

Earlier this month, Fed Chairman Powell testified before Congress, stating that the labor market is "strong but not overheated," and the U.S. economy is no longer overheating, increasing the likelihood of rate cuts.

In June, the U.S. unemployment rate rose to 4.1%, reaching a two-and-a-half-year high but still at historically low levels.

CME Group's FedWatch tool, based on federal funds rate futures trading data, predicts the Fed's rate trajectory, indicating that traders are almost certain the Fed will cut rates at the September meeting.

Clarida said, "Many are waiting for the Fed to cut rates. There is about $5 to $6 trillion in U.S. money market funds. Once rates are cut, it will be a big deal." His company also believes that the first rate cut may occur in September.

The Fed's 11 rate hikes from 2022 to 2023 have had a significant impact on the bond market. Clarida said that the substantial rate hikes have led to a "generational reset" in the initial yield of high-quality fixed income assets. Therefore, fixed income appears very attractive in terms of long-term return prospects after risk adjustments compared to other assets.

Clarida added that as rates decline, the cost of forex hedging may decrease, benefiting Asian investors. Fed rate cuts will narrow the interest rate differential with Asian central banks, easing pressure on local currencies.

He said, "In the case of Fed rate cuts, hedging costs often decrease, and over time, the attractiveness of investing in U.S. bonds may increase for at least some Asian investors."

However, he cautioned that from now until December, unexpected events may still occur. Strong inflation could prevent rate cuts, or the U.S. economy could slow down significantly, prompting the Fed to cut rates faster, or escalating geopolitical risks could push down bond yields.

Clarida was appointed as Vice Chairman of the Fed by Trump. During his tenure, the Fed carefully planned two rate cuts in March 2020 to stabilize the economy during the COVID-19 pandemic Clarity also shared his views on artificial intelligence (AI). The AI ​​boom has driven the stock market to rise rapidly, and company valuations have repeatedly hit new highs.

He said, "AI technology will bring about changes, but its impact may not appear in macroeconomic data for several years," referring to productivity output and inflation data.

He also cited the vigorous development of personal computers in the 1980s as an example, pointing out that the contribution of this technology to productivity growth and whether it can be sustained is also subject to discussion