Easing cycle has already started, so you can ignore the Fed: Paulsen

  • Investors should worry less about what the Fed will do as it is now lagging behind the inflation slowdown, Jim Paulsen said.
  • Markets are signaling an easing cycle has already begun, the Leuthold Group’s chief investment strategist told Bloomberg TV
  • “I don’t really care what the Fed is going to do because the Fed is not controlling this ship.”

Renowned investor Jim Paulsen thinks markets are already entering an easing cycle, making it less important to focus on what the Federal Reserve will do on monetary policy.

The Leuthold Group’s chief investment strategist told Bloomberg TV on Thursday that bond yields are falling, the dollar is weakening and junk bond spreads are narrowing.

“I don’t really care what the Fed is going to do because the Fed is not controlling this ship,” Paulsen said. “Looking at what’s happening, we’re already in a brand new easing cycle.”

The comments come as consumer and producer prices slowed more than expected in July, leading investors to hope the Fed will take a less aggressive stance on rate hikes.

But the central bank remains steadfast in its goal of bringing inflation back to its target of 2%. Over the past week, some policymakers have warned that it is still too early to declare victory over inflation, despite the improvement in the latest readings.

Paulsen said the Fed “has been lagging all along,” referring to its past failure to recognize that accelerating inflation was more than a passing problem. Now the Fed is not reacting fast enough to slowing inflation.

And the reason inflation is starting to cool is because financial market conditions began to tighten last year, before the Fed raised interest rates for the first time early this year, Paulsen said.

“The Fed is still trailing the curve, but all the markets are moving the other way and starting to ease,” he said.

Meanwhile, Paulsen turned his attention to the economic outlook, noting that avoiding a recession will be a more important factor for the markets than the central bank.

“To keep this going, we have to decide we’re not going to recess,” Paulsen said. “That’s almost becoming a bigger problem for me than inflation now.”

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