The Fed cutting rates too early risks sparking a worst-case scenario of resurgent inflation, 'The Big Short' investor Steve Eisman says

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The Fed cutting rates too early risks sparking a worst-case scenario of resurgent inflation, 'The Big Short' investor Steve Eisman says
Reuters/ Jessica Rinaldi
  • The best thing the Fed can do right now is nothing, according to Steve Eisman.
  • The investor of "The Big Short" fame said inflation could rise if the Fed cuts rates too early.
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The best thing the Fed can do right now is nothing, because cutting interest rates too early risks sparking a "worst-case" scenario, according to "The Big Short" investor Steve Eisman.

Speaking to Bloomberg on Wednesday, Eisman pushed back against the idea that Fed rate cuts should be imminent. He warned that lowering rates now would risk reigniting inflation, which would be worse than if rates remained higher for longer.

"I think the Fed should do nothing," Eisman said. "The economy is good. Why would you? "

The Fed should wait until at least June to consider rate cuts, Eisman said. He pointed to the stagflation crisis in the early 1980s, when central bankers made the mistake of easing monetary policy too soon. That caused inflation to skyrocket past 14% in 1980, while effective interest rates in the economy notched 19% the following year.

"The best thing to do would be to pat yourself on the back, declare victory, and say we're completely data-dependent. And if things start to weaken a little bit, they can always cut rates. Otherwise, do nothing," Eisman said.

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The Fed has been fighting inflation since March 2022, when central bankers began their campaign to aggressively raise interest rates and tighten financial conditions. Rates are now hovering at their highest levels since 2001 — but inflationary pressures still linger in the economy, commentators have warned, with consumer prices rising a hotter-than-expected 3.1% in January.

Fed officials have said they aren't poised to cut interest rates until they're more confident inflation will return to the 2% price target. Most central bankers see the risk of cutting rates too early, according to the minutes of the Fed's January policy meeting.

But the average investor seems content to blow past these warning signs. Markets are still pricing in a 43% chance the Fed could cut rates by at least 100 basis points by the end of the year, according to the CME FedWatch tool — higher than the 75 basis-points the Fed has officially projected for the year.

Investors are likely to be disappointed by the size and rate cuts this year, Deutsche Bank warned in a recent. note. Eisman has also warned of investor disappointment to come this year, given that markets are "too fricking happy" and exuberant over the recent rally in stocks.

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