Fed’s cut misaligned with inflation reality
Speaking to ET Now, Walker argued that the Fed’s reliance on labour market data is questionable, especially after recent revisions revealed significant flaws. He stressed that consumer price data, which remains elevated, offers a clearer picture: “Inflation is still high in the US, far above the 2% target. Cutting rates against this backdrop risks fuelling stagflation,” he said.
According to Walker, the Fed should focus on tackling government overspending and addressing structural inflationary pressures rather than easing policy prematurely. “This cut looks more like risk management than genuine growth support,” he added.
What it means for Asia
The Fed has also signaled two more rate cuts in 2025. At first glance, this could benefit Asia’s export-driven economies by easing debt burdens and weakening the dollar, both positives for emerging markets. But Walker warned of offsetting risks: “The problem is tariffs. The US under Donald Trump has shifted toward protectionism, which directly hurts Asian exports. So while weaker US rates and a softer dollar help, tariffs undo much of that good news.”
Walker noted that Asia’s growth outlook is mixed. While fundamentals in some emerging economies remain strong, they will still face investor caution driven by slowdowns in advanced economies.
Lessons from 2008 and what’s different now
Walker, who accurately predicted the 2008 financial crisis, sees parallels but also key differences. “In 2008, the housing sector was unsustainable and destined to collapse. Today, there isn’t a single sector with the same obvious risks. Instead, the bigger problem lies in government behaviour—years of ultra-easy monetary policy and unchecked spending have created persistent inflation,” he explained.
He cautioned that policymakers in advanced economies are unwilling to reverse course: “Politicians don’t want to cut spending or stop printing money. That’s why stagflation—a mix of high inflation and slowing growth—remains the biggest threat.”
Fed’s dot plot: Divisions surface
Walker highlighted divisions within the Fed itself. While one new member pushed for a larger 50 bps cut, six members projected no further cuts this year. “That’s nearly half the committee. If a few more shifts toward the inflation-hawk side, markets could face disappointment,” he said.
He added that forecasting the rate path is like “spinning a roulette wheel,” as weekly shifts in data and politics cloud the outlook. Walker expects the US to enter recession by 2026, which would justify deeper cuts. Until then, however, elevated inflation could keep policy tighter than markets hope.
The bottom line
The Fed’s latest rate cut may provide short-term relief for markets, but Walker warns that the underlying risks of stagflation and policy missteps remain unresolved. For Asia, the impact will depend on how individual countries navigate global headwinds, while China could emerge stronger in the medium term.
“In times like this, investors should focus on fundamentals and country-specific policies rather than getting lost in global noise,” Walker advised.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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