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Political pressures

Elevated interest rates can significantly impact the economy by making borrowing more expensive for consumers and businesses, which can reduce spending and investment, thereby slowing down economic activity.

O’Leary doubts that President Joe Biden desires such an economic climate in this election year. “It is going to be political," he stated. "The incumbent wants to talk about the economy, wants to talk about jobs, but never ever do they want to be in a rising rate environment. They want the Fed to cut rates.”

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Rate cuts can stimulate the economy by reducing the cost of borrowing for individuals and businesses. This encourages spending and investment, leading to increased demand for goods and services, which can boost economic activity and create jobs.

O’Leary noted, “So the pressure politically on the Fed cutting is going to be very high, particularly as you roll into Q3, when it's magic to have a rate cut right before you're in the ballot booth. That's classic.”

Adjusting expectations

Recent comments from Fed Chair Jerome Powell highlight why investors waiting for a rate cut may need to exercise patience.

In a CBS interview, Powell talked about the danger of “moving too soon,” saying, “the prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.”

Wall Street has also recalibrated their expectations.

For instance, Goldman Sachs recently revised its forecast, now expecting the Fed to start cutting interest rates in May, not March. The Wall Street juggernaut anticipates four consecutive rate cuts from May to September, with an additional cut in December.

Similarly, UBS has updated its projection. Initially predicting rate cuts to begin in March, the firm now expects the Fed to start lowering rates in May.

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Jing Pan Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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