The Fed unexpectedly cut interest rates by 50 basis points, Carlyle's Thomas warns: Inflation risks are rising, 4.5% may become the new normal

According to the financial news app Zhitong Finance, Jason Thomas, the global head of research and investment strategy at Carlyle Group, warned investors to prepare for a possible resurgence in inflation, as this could lead Federal Reserve officials to maintain interest rates around 4.5%. Thomas believes that despite the current high level of interest rates, after the Fed's 50 basis point rate cut this week, the central bank is expected to cut rates at least two more times. However, as industries that have been stagnant due to rising borrowing costs begin to recover strongly, the world's largest economy may face new price pressures.

In an interview on Thursday, Thomas suggested that fund managers may need to accept a benchmark interest rate of 4% to 4.5% as the "new normal." This view was put forward after the Fed policy meeting on Wednesday, when the federal funds rate range was set at 4.75% to 5%.

He further pointed out, "While there will certainly be more rate cuts, I believe the room for rate cuts is smaller than what the market expects." Currently, traders generally expect the Fed to cut rates by about 70 basis points by the end of this year, a much more aggressive expectation than the Fed's forecast of a half-point rate cut in 2024 in its dot plot.

Thomas emphasized, "If we expect rates to return to the levels of 2019, we must ignore all the changes that have occurred since then." This indicates that despite the market's optimism about rate cuts, investors should remain vigilant about potential inflation pressures, as this could limit the downward space for rates.

It is reported that in the early hours of Thursday Beijing time, the Fed unexpectedly announced a significant 50 basis point rate cut, lowering the benchmark rate from a 20-year high of 5.25%-5.5% to a range of 4.75%-5%, marking the first rate cut in over four years. In the previous two years, the Fed successfully suppressed inflation through high rates, but also increased borrowing costs for American consumers.

This rate cut reflects the Fed's focus on the job market, especially in the recent economic slowdown. Over the past 14 months, the Fed has been curbing the most serious inflation problem in 40 years through high rates. Since peaking at 9.1% in mid-2022, inflation has gradually declined, dropping to 2.5% in August this year, close to the Fed's 2% target.

Fed officials also indicated that they expect to cut the benchmark rate by 50 basis points at the November and December meetings. By 2025, four rate cuts are expected, with two planned for 2026. The Fed expressed confidence in overcoming inflation in its statement, stating that they "believe more in inflation continuing to move towards the 2% target."