Jerome Powell's Dovish Approach Creating 'Irrational Exuberance' Among Investors, Says Ex-FDIC Chair: 'This Is A Mistake'

The financial markets’ optimistic reaction to the Federal Reserve’s potential interest rate cuts in 2024 is dangerously overblown, cautioned former FDIC Chair Sheila Bair.

What Happened: Bair, during her interview with CNBC, expressed apprehensions about Federal Reserve Chair Jerome Powell‘s dovish approach at the recent policy meeting. She warns that it has instigated “irrational exuberance” among investors, which could be hazardous.

The Fed announced its decision to maintain rates for the third time in a row last Wednesday, suggesting at least three rate cuts in the following year, amounting to 75 basis points. This announcement led to the Dow hitting record highs for three consecutive days.

See Also: Record High For Dow, Yet Economist David Rosenberg Flags Caution: ‘Powell Didn’t Want To Talk About A Hard Landing On The Podium’

Bair thinks that the Fed’s decisions have fostered excessive optimism, and this trend could be short-lived.

She said, "This is a mistake. I think they need to keep their eye on the inflation ball and tame the market, not reinforce it with this … dovish dot plot.”

Although the Fed appears to be shifting its attention towards a potential recession, Bair sees no evidence of such a risk in the current data. She also pointed out that factors like deficit spending, trade restrictions, and an aging populace could intensify inflation pressures.

Her advice was, “[Rates] should stay put. We’ve got good trend lines. We need to be patient and watch and see how this plays out.”

Why It Matters: Earlier in the week, the Federal Reserve announced its decision to maintain the federal funds rate target range at 5.25&-5.5%, marking the end of a rate hiking cycle that started in March 2022. The Fed also noted that although inflation has eased over the past year, it remains elevated and confirmed its strong commitment to bringing it back to the 2% target.

However, economist and former Treasury Secretary Larry Summers warned that it is too early to say that we have landed softly. Summers highlighted that some of the underlying inflation measures are still running well above 2% and that it isn’t certain that it won’t increase again.

Read Next: Fed Holds Rates Steady, Signals End To Hiking Cycle; Projects Interest Rates Falling To 4.6% By Year-End

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