Prominent short seller: Powell is self-contradictory, another 50 basis point rate cut this year is not surprising

After the Federal Reserve decided to cut interest rates by 50 basis points, former Chief Economist of Bank of America Merrill Lynch in North America and current President of Rosenberg Research, Rosenberg, accepted an interview with MarketWatch.

Rosenberg has always been a critic of Powell and the Federal Reserve. Rosenberg believes that although the Fed's rate cut is the right move, it is too little, too late. He suggests that investors shift towards interest-sensitive assets, expecting this rate cut cycle to bring the federal funds rate down to the pre-pandemic level of 1.75%.

MarketWatch: What is your view on the Fed's rate cut early Thursday morning, did the Fed finally get it right this time?

Rosenberg: There are two factors to consider. This rate cut was actually on the table at the Fed meeting at the end of July, but they decided not to act. Typically, they would cut rates by 25 basis points first, and then another 25 basis points. This 50 basis point rate cut actually acknowledges that they missed the opportunity to cut rates for the first time six weeks ago, so they doubled down.

MarketWatch: Does this move bring us closer to the elusive "soft landing" that Powell and his colleagues hope for?

Rosenberg: The basic situation is that we are currently in a soft landing. If you notice Powell's tone at the post-meeting press conference, this rate cut is just a down payment to ensure the status quo of the "Goldilocks economy."

MarketWatch: Do you believe in this?

Rosenberg: No, I don't believe in fairy tales. The Federal Open Market Committee is suffering from typical cognitive dissonance. Monetary policy is still too tight. The Fed's 50 basis point cut is just an admission that it has maintained overly tight policy for too long, and Powell's efforts are just to beautify this situation. How can he talk about a robust U.S. economy while also saying that the downside risks to the labor market outweigh the upside risks to inflation?

MarketWatch: Are you still concerned about the upcoming recession, or does the Fed's action ease your mind?

Rosenberg: The Fed's action does not ease my mind at all. Although they are to some extent catching up with the curve, they are still far behind. Considering that the federal funds rate has risen by over 500 basis points from its lows, this significant rate cut is just a small dent. While the Fed is easing policy, the impact of their actions in 2022 and 2023 still lies ahead of us. Economic growth will not be smooth sailing after experiencing the most severe tightening cycle since the Volcker era in the 1980s. While the economic downturn has been delayed, it has not been avoided.

Look at the contradictions in Powell's remarks. He talks about a robust labor market, yet in his opening statement, he discusses how employment data is artificially inflated. It is absurd to talk about how stable the labor market is while also saying that the data is inflated. Powell's speech is self-contradictory.

Powell mentioned the Federal Reserve Beige Book at the press conference. He brought it up on his own initiative, not in response to a question. The Beige Book is not subject to revisions and provides a vast amount of information about conditions across the country. Recently, it revealed that half of the U.S. is in a recession. We analyzed the latest Beige Book and found signs of a recession, similar to July 1990, March 2001, and December 2007, indicating that they are far behind the curve.

MarketWatch: What will happen to investors now? Discuss the outlook for stocks, bonds, gold, and the dollar.

Rosenberg: This means that the U.S. 10-year Treasury yield will fall to 2.5% or lower, and bond investors can expect stock-like performance. I advised clients to heavily buy long-term zero-coupon bonds, which, if my forecast is correct, will provide substantial returns in the next year.

In the stock market, you should buy industries that perform well during periods of slowing growth, decreasing inflation, and lower interest rates. This includes utilities, telecommunications services, real estate, finance, and high dividend stocks.

As for gold, the core of my portfolio strategy currently is the bond-gold allocation. Rates will decline, the dollar will depreciate, and gold will appreciate.

MarketWatch: Are you concerned that this easing cycle will create a dangerous bubble in the stock market?

Rosenberg: The stock market is already in a price bubble. There is a great deal of optimism in the market about earnings in the coming years. Whether the stock market will become even more bubbly remains to be seen.

But maintaining a strong stock market is not part of the Fed's mandate. The labor market is. Stock investors should worry about a recession and lower earnings. If the Fed cuts rates and the economy does not go into a recession, the S&P 500 will rise. If we experience a recession, the stock market will fall even with rate cuts.

MarketWatch: Perhaps the rate cuts in 2024 will end after just one cut. What do you expect, and more importantly, what should investors realistically expect?

Rosenberg: There are two more Fed meetings this year, I wouldn't be surprised to see two more 50 basis point rate cuts. But the question is where the endpoint of the policy rate is?

Look at what Powell said at the August Jackson Hole meeting: "Labor market and inflation pressures have returned to levels before the onset of the COVID-19 pandemic in early 2020." The federal funds rate before the pandemic was 1.75%. So, we will return to 1.75%. I don't know if this will happen in 2025 or 2026, I just know where the destination is.

MarketWatch: You have been critical of the Fed's lag on inflation issues. Do you think Powell and others will learn from their mistakes now?

Rosenberg: Historically, the Fed has always acted gradually. It is a slow-moving machine. When it cuts rates by 50 basis points, it sees things that many of us do not. People should ask why they cut rates by 50 basis points? The Federal Reserve is lagging behind on the inflation curve and now moving in the opposite direction on the growth curve. Previously, they said "don't worry about inflation," now they are saying "don't worry about the economy." The Federal Reserve is making mistakes in both directions, as has been the case since its establishment over a century ago. If the Federal Reserve were flawless, we would not have recessions