As Fed Gears Up For Cuts, One Hedge Funder Is Focused On A Bigger Catalyst: Japan's Central Bank

Whether the Federal Reserve will implement a 25-basis-point reduction or a 50-basis-point cut, is top of mind ahead of Wednesday’s meeting.

But there’s an "even bigger question" to answer, Thomas Hayes of Great Hill Capital tells Benzinga.

What will Japan's central bank decide at its meeting on Friday? Recall how Japan's rate hikes created volatility, particularly in tech stocks.

“Fed should have cut [rates] in August,” Hayes says. Instead, Japan’s central bank hiked and the Fed didn't. As a result, “it created a liquidity mismatch that caused an abrupt selloff” in the Magnificent Seven stocks.

See Also: Gold ETFs Poised For Liftoff: Can The Fed’s Rate Cut Propel Prices To New Heights?

If the Bank of Japan (BoJ) meets Friday and hikes again while the Fed only cuts 25 basis points, more turbulence could arise, Hayes predicts.

Things should be alright if the Fed cuts 50 basis points and the BoJ hikes 25 basis points, he says. Likewise, if the BoJ keeps rates unchanged and the Fed cuts 25 basis points.

The Fed's Decision: Of the last three 50 basis-point cuts, March 2020 “worked great,” Hayes recalls. The cuts from September 2007 and January 2001 each has a “bad outcome.”

Fed Fund Futures suggest a 65% chance of a 50 basis-points cut, though Hayes isn't sure. 

A cut that size could suggest the Fed is falling behind. It might also give the appearance of political motivation, which the Fed will most likely try to avoid. With the effective federal funds rate (EFFR) at 5.33%, more than 230 basis points above inflation, Hayes believes monetary policy is already too restrictive.

Hayes expects the Fed will go with a 25 basis points cut paired with dovish commentary, suggesting further cuts in November and December. While the market is pricing in 100-125 basis points of cuts by year-end, Hayes is in the 75-100 basis points of reductions camp.

Hayes also points to stronger-than-expected growth, with Q3 GDPNow estimates at 2.5% and 15% earnings per share (EPS) growth forecast for 2024.

"Hard to have a recession with GDP growing over 2%," Hayes said. 

Hayes is not repositioning ahead of the rate cuts. However, other major funds made significant moves in the second quarter ahead of the rate-cut cycle.

According to HedgeFollow:

• Berkshire Hathaway sold more Apple Inc AAPL shares
• State Street bought Nvidia Corp NVDA shares
• Coatue picked up Nvidia and Dell Technologies DELL
• Two Sigma bought CME Group Inc CME shares.

Now Read: S&P 500 Briefly Hits Record High Just Ahead Of Fed Rate Cut, Extends 7-Day Winning Streak

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