DWS Group Americas’ David Bianco: Markets expect the Fed to cut rates this week

Market seems confident about a Fed rate cut as an insurance measure, with economy expected to pick up early next year. How do you see things?

Host (Mike)

David Bianco

Beware what you wish for. Markets expect a Fed cut this week, but many think this could be a mistake. The 10-year TIPS yield indicates R-star is well above 1.75%.

Gold prices rising and dollar weakening suggest market positioning for cuts.

The Fed sees a softening labor market. How far are we from the neutral rate (R-star)?

Host (Mike)

David Bianco

We might be at neutral, maybe a little more room downward. After 5 years of inflation above target, the Fed's inflation target covenant with bond investors shows a little default.

10-year yields up, but there's plenty of Treasury demand and we've seen bigger moves down than up.

Host (Steve)

David Bianco

If the goal is to stimulate housing and consumer durables, cutting Fed funds won't help much. Lower rates might accelerate AI transition from labor.

Labor market has many factors: mid-cycle environment, demographics, immigration, cost of labor, AI.

David Bianco

Pick your spots. AI plays had a great year and will stay magnificent, but advise diversification into financials, healthcare, electric utilities.

Concerns about chip pricing ROI, competition, efficiency. Cost of electricity for data centers is huge and rising.

Next year has urgent capex spending, AI, and tax policy tailwinds - a 'run-it-hot' economy. Implications for earnings?

Host (Mike)

David Bianco

Run-it-hot policies raise questions about who benefits. Long-term bond investors aren't interested. Need 10-year yield falling rather than sticky when Fed signals cuts.

Topic for midterm elections next year. Trying to broaden economy while avoiding fiscal challenges.

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