Fund manager Freddie Wright said the only reason the Federal Reserve might cut interest rates is to help the U.S. pay interest on its national debt.
His comments come ahead of the Fed’s monetary policy decision on Wednesday, which could shed some light on the Fed’s interest rate trajectory. The market generally expects the Fed to maintain its benchmark overnight borrowing rate in the range of 5.25%-5.5%.
Traders currently only see a 50-50 chance of a rate cut as early as September, and expect a rate cut of just a quarter of a percentage point by the end of the year, according to Fed data. CME Group Fed Watch Tool.
Latitude Investment Management’s Wright told CNBC’s “Squawk Box Europe” on Wednesday that he believes current interest rates are “absolutely adequate” to balance inflation and growth prospects in the world’s largest economy.
“I think birds should think that in a world where inflation has bottomed out, is picking up in some cases, and is showing early signs of life, supported in part by a strong economy and massive government stimulus, they will keep going.
“The way we’ve thought about it over the last 15 years, I don’t think there’s an economic rationale for cutting spending in the longer term. The reason they might be cutting spending is because the U.S. government can’t afford it (and they’re not doing it) — that’s An even scarier reason to cut back,” he added.
CNBC has reached out to the Federal Reserve for comment.
Traders work on the New York Stock Exchange trading floor during early trading on April 29, 2024 in New York City.
Michael M. Santiago | Michael M. SantiagoGetty Images
The U.S. government is paying more to repay ballooning debt after experiencing rapid interest rate hikes, tax cuts and a massive stimulus package aimed at supporting the economy during the Covid-19 pandemic.
recent analyze U.S. federal interest payments are expected to climb to $870 billion this year, according to the Congressional Budget Office. The forecast reflects a 32% increase in interest expense from last year’s $659 billion.
Growth in interest payments ‘pretty staggering’
Wright said the “exponential” growth in U.S. debt and government spending could cause problems for whoever wins the November presidential election.
“The facts are there. You borrowed money. You have a fiscal deficit of 5%, 6%. Either you withdraw all the stimulus but you still need a buffer period, which is going to be a real challenge especially in a country like the United States. Locally, these are legislated otherwise you have to borrow money.
Asked whether he thought the U.S. government debt burden might no longer be attractive to some major international investors, Wright responded: “Yes, the solution is either to raise yields significantly or lower government spending significantly, because that Will result in less issuance and solving the problem in a different way.
He added, “It’s a bit like a conspiracy theory because debt levels have never mattered. Debt as a percentage of GDP has gone up every year since the war. So it goes up in a straight line and there are bulls and bears. “
However, Wright said the level of U.S. government debt is not the key issue.
“It’s the change of it and the construction of it. I think just the growth of these interest payments is really quite staggering,” he said.
About The Author
