The Fed shouldn’t ‘waste’ rate cuts now and risk another inflation spike, ‘Big Short’ investor Steven Eisman says

The US economy is healthy, which means the Fed shouldn’t needlessly cut rates, “The Big Short” investor Steven Eisman said.

If they do, we may just get a repeat of 2021, when inflation rocketed higher.

“I actually think deep down, Powell is petrified of redoing Volcker again,” Eisman said in a CNBC interview, referring to the Fed chair who hiked rates to 20% in the 1980s. “Look, they’ve engineered what looks to be a soft landing, inflation is coming down, the economy is still strong. Why would you waste rate cuts now and risk a resurgence of inflation?”

There’s been speculation galore about when Jerome Powell will wave the green flag for the first rate cut in 2024 — and how aggressively those rates will come down after the first cut. According to Bank of America analysts, investors still expect a total of six rate cuts this year, even after Powell’s hawkish remarks last week.

But Eisman thinks there’s no need for the Fed to cut rates without a significant negative data point.

“Why everyone is getting so hysterical, I don’t get it,” he said. “Everyone should just wait. When we get a negative data point, we can talk about it. Until then, seems to me the economy is doing just fine.”

GDP, jobs, and inflation data have all been strong in the past few months. And most of the US economy — about 70% — is driven by the consumer, Eisman explained. Right now, they seem to be doing pretty well: January’s consumer spending data showed Americans splurged an extra $133.9 billion to cap off the year-end holiday season.

It’s not as though there are no weak points in today’s economy. The commercial real estate sector seems to be crumbling, but the office market crash at the center of those gyrations is not big enough to knock down the economy, Eisman said. What’s worth keeping an eye on is the US consumer.

“If consumer credit quality were to start to really deteriorate, like it started in late 2006, okay,” he said. “Until then, as long as the consumer is healthy, I don’t think there’s really much to talk about.”