'The market has gone too far:' Chief global strategist predicts when the Fed will cut rates

Published Sun, Feb 26 20237:49 PM EST

Investors should not expect a cut in interest rates until 2024 thanks to a strong U.S. economy and the potential for a delayed recession, according to the chief global strategist at Principal Global Investors. Seema Shah told CNBC Friday that a tight labor market, fueling inflation, means that the previously predicted third-quarter recession for the U.S. economy will likely be delayed until later in the year. In fact, the Federal Reserve keeping interest rates higher for longer is the "scenario that we're looking at now," Shah told CNBC's Julianna Tatelbaum. "You're looking at tighter policy, which does unfortunately mean that for the market, it is a little bit more concerning." The employment picture started 2023 on a stunningly strong note , with nonfarm payrolls posting their biggest gain since July 2022 despite a rapid increase in interest rates last year. 'Absolutely no cuts this year' When asked when investors should expect a cut in interest rates, Shah responded that it wouldn't be until 2024. It comes as economists appear torn on when the Fed will start to reduce rates, and by how much. Goldman Sachs expects interest rates to hit 5.38% by the second quarter, with the first cut to 5.13% expected in the first three months of next year. Economists polled by Reuters, however, expect the U.S. central bank to cut rates in the fourth quarter of this year to a range of 4.75%-5.0%, after hitting a peak of 5%-5.25% in the third quarter. The U.S. central bank currently targets a range of 4.5%-4.75% for its main interest rate. Shah explained that tracking inflation numbers now and comparing them to the 1970s cycle showed a very close correlation; if rates were cut too early, inflation could increase. The 1970s saw double-digit rates of inflation in the United States. As a result, the U.S. central bank was forced to raise interest rates to 20% after inflation initially dipped in the mid-70s but rose again more strongly later in the decade. "The one big takeaway is that for the Federal Reserve, they clearly have a lot more work to do," Shah, a strategist at Principal, an asset manager with more than $700 billion under management as of the end of 2021. "We are expecting further rate hikes. Absolutely no cuts this year." Stock market impact Shah implied that markets had not yet fully priced in the cost of rates staying up this year. She pointed toward a surge in bond yields over the past two weeks as an indicator of "pressure that is building up" for a re-pricing in stock markets. "I think that the market has gone too far," she said, referring to the 9% gain for the S & P 500 since September. "We have seen a number of investors saying: 'Look at the economy; it is so strong. How can we possibly be negative at this stage?' ... We're just saying, the Fed is going to keep going, that means that pressure will continue," she added. .SPX 1Y line The strategist echoed comments made by JPMorgan Chase CEO Jamie Dimon, who said Thursday that containing inflation remains a work in progress for the Federal Reserve while noting the U.S. economy continues to show signs of strength. "I have all the respect for [Fed Chair Jerome] Powell, but the fact is we lost a little bit of control of inflation," Dimon said in an interview with CNBC's Jim Cramer during the " Halftime Report ." Dimon himself said he expects that interest rates could "possibly" remain higher for longer, as it may take the central bank "a while" to get to its goal of 2% inflation. — CNBC's Sarah Min contributed reporting