Steve Eisman, a big short seller, said on Tuesday that if the Federal Reserve cut interest rates this year, a foam would form in the US stock market. He believes that the Federal Reserve should remain stagnant and maintain the current high interest rates this year, citing the fact that the US economy is currently operating well.
"My view is that the economy is in good condition. I personally think the Federal Reserve should not cut interest rates this year," he said in a program: "What I really worry is that if the Federal Reserve does cut interest rates, I guess the market will become full of foam, and then we will encounter real problems. So the Federal Reserve should do nothing, and then wait for the data to weaken."
Eisman is the prototype of the movie "Big Short", and as a senior portfolio manager at Neuberger Berman, he is known for short selling subprime mortgages before the global financial crisis broke out.
Although the "foam theory" still prevails in the market, the strong earnings growth of large technology stocks has pushed up the target price of the 2024 S&P 500 index by Wall Street veterans. However, expectations for interest rate cuts have weakened after personal consumption expenditure (PCE) and ISM manufacturing data showed the latest inflation signals.
Despite this, Federal Reserve Chairman Powell reiterated his plan to cut interest rates three times this year at the FOMC meeting in March, but Eisman opposed this dovish stance.
He believes that all the data reminds people not to rush to expect the Federal Reserve to cut interest rates, and adds that unemployment is falling, wages are rising, and the only thing worth complaining about is high inflation.
"Employment opportunities are still scarce, so consumers are good. So why do you want to lower interest rates to destroy it?" he said.
In fact, it's not just Eisman who thinks so. San Francisco Federal Reserve Chairman Mary Daly also stated on the same day that the "three rate cuts within the year" reiterated by officials last month is a reasonable expectation, but there is currently no rush to reduce borrowing costs.
"I think this is a very reasonable basic expectation. However, given the strong growth momentum of the US economy, there is currently no urgency to adjust the central bank's interest rates, and staying put is the right policy at the moment," she said.
Finally, Eisman emphasized that there is nothing worse than the Federal Reserve lowering interest rates first and then raising them when necessary, as historical lessons have proven.
"One thing I often think of is that in 1999 and 2000, the market must have been in the midst of a foam. But what killed the foam was not the foam itself, but the Federal Reserve's sharp increase in interest rates, which plunged the economy into recession," he said.