The Fed unexpectedly cut interest rates by 50 basis points, KKR's Thomas warned: inflation risks are rising, and 4.5% may become the new norm.

Jason Thomas, the global head of research and investment strategy at Kaire Group, warned investors to prepare for a potential inflation rebound, which could lead Federal Reserve officials to keep interest rates around 4.5%. Thomas believes that despite the current high level of interest rates, the central bank is expected to cut rates at least two more times after the 50 basis point cut this week. However, as industries that have been stagnant due to rising borrowing costs start to recover strongly, the world's largest economy may face new price pressures. In an interview on Thursday, Thomas suggested that fund managers may need to accept a baseline interest rate of 4% to 4.5% as the "new normal". This view was put forward after the Federal Reserve policy meeting on Wednesday, when the federal funds rate range was set at 4.75% to 5%. He further stated, "While there will definitely be more rate cuts, I believe the scope for rate cuts is smaller than what the market expects." Currently, traders widely anticipate that the Fed will cut rates by about 70 basis points by the end of the year, a much more aggressive expectation than the Fed's forecast of a half basis point rate cut in 2024 according to its dot plot. Thomas emphasized, "If we expect rates to return to the levels of 2019, we must ignore all the changes that have taken place since then." This suggests that while the market is optimistic about rate cuts, investors should remain vigilant about possible inflation pressures, as this could limit the downward space for rates. It is reported that in the early hours of Thursday Beijing time, the Federal Reserve unexpectedly announced a significant rate cut of 50 basis points, reducing the benchmark interest rate from a 20-year high of 5.25%-5.5% to a range of 4.75%-5%, the first rate cut in over four years. In the previous two years, the Fed successfully suppressed inflation by high rates, but also increased borrowing costs for American consumers. This rate cut reflects the Fed's concern about the job market, especially in the recent economic slowdown. In the previous 14 months, the Fed has been suppressing the most serious inflation problem in 40 years through high rates. Since reaching a peak inflation rate of 9.1% in mid-2022, inflation has gradually declined to 2.5% in August of this year, close to the Fed's 2% target. Fed officials also indicated that they expect to cut the benchmark interest rate by another 50 basis points at the November and December meetings. By 2025, four more rate cuts are expected, with two planned for 2026. The Fed expressed confidence in overcoming inflation in its statement, saying "we believe that inflation will continue to move towards the 2% target."