The US Federal Reserve might have been better off implementing 25 basis point increases in July and September rather than starting with a 50 basis point cut, suggests Gargi Pal Chaudhuri, Head of iShares Investment Strategy Americas at BlackRock.

Sharing her insights on the Federal Reserve’s current policies and their implications for financial markets amid resilient US economic data and an upcoming election, Chaudhuri highlighted the ongoing cycle of rate cuts and what it means for investors navigating a landscape of both opportunities and uncertainties.

However, she views this initial action as acceptable since the current inflation environment does not necessitate such elevated interest rates. She emphasised the importance of normalising policy and indicated that further adjustments are likely, with expectations of an additional 25 or 50 basis points by the end of the year.

This approach would transition rates from a restrictive stance to a more normalised level, which is a logical step forward, Chaudhuri said in an interview with CNBC TV-18.

Below is the verbatim transcript of her interview.

Q: The big talking point from a U.S. perspective is increasingly the question being asked by some of the veterans. Stanley Druckenmiller recently raised that question, whether the Feds made a mistake with the 50 basis point cut, because the bond market is saying so, and rather loudly recently. What’s your sense?

A: Look, I think the pace of policy that was in place prior to September, so having the Fed funds rated being above 5%, that was put in place for an inflation regime of 5%. As inflation started moving lower, and obviously we are now very stably at much below the previous levels of 5%, and sitting comfortably in the 3% range, we don’t need to have such restrictive policies.

The Fed perhaps should have gone 25 in July and 25 in September. They started with a 50, that’s absolutely fine. This is not a regime of inflation that requires such high interest rates. I think they need to normalise policy. They will keep doing so. They will continue to move, we think, another 25 or 50 basis points by the end of this year. And that will just be bringing level of rates from restrictive down to a more normalised level of rates, which make absolute sense.

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Q: There are two points here, the neutral rate may be much higher. It may not be that’s one point many are making. The second is data out of the US is still very strong. And as, again, I go back to what Druckenmiller said, the Fed is kind of wedded to its guidance, not so much to the data. His point is, they should get rid of the guidance. They made a mistake in 21, which I think we can all agree with the benefit of hindsight. We are at the same juncture in an opposite sense now?

A: Look, when we look back, should they have maybe started even earlier is what I think. It’s not about, if the issue is going 25 versus 50, look, it doesn’t matter. Rates are really, really restrictive. They are not the level of interest rates that need to be in place for a 3% inflation, perhaps even 2.5% inflation and that is what the Fed is doing, normalising. I think we need to make a very significant difference between normalising policy and restrictive policy. And right now, we’re in the process of normalisation. That might end up meaning a much higher neutral rate of somewhere around 3.5%. We are not there yet.

The data, as you point out, continues to be so resilient. There is a clear story of U.S. exceptionalism. But that doesn’t mean, and in fact, more so, I think the Fed is enhancing the growth aspects, which I think are amazing at this point.

Q: From what I hear, it seems it’s party on, because you’re expecting the rate cut cycle to continue, irrespective of the data being as resilient as it is. So where does the money go now, and can the outcome of the U.S. election, whichever way it goes, can it at all be a party pooper?

A: A couple of questions there, and I will take them each at a time the time. Earnings growth is strong. We are in the middle of earnings cycle, obviously, globally. What we can see, especially again in the US, is earnings growth remain pretty robust and so far, and obviously next week is a big week, we are excited about that. So far, the earnings guidance, anything that we can learn about corporate credit or anything that we’re hearing about consumers, all are actually pointing to a very positive outcome so that’s good news.

Secondly, you make a really important point about elections. That’s certainly a risk event. But it is something that in two or three months, we will not be talking about. The risk event will be over.

The third point that I want to make is just around the cutting cycle, that is we’re in the middle of a cutting cycle that’s going to continue. So, the combination of a risk event passing, and of course, around the elections, can we see some higher volatility, absolutely. But then once it’s done, it will be over. Better earnings growth, continued very strong earnings growth, as well as a cutting cycle that will continue, they bode very well for risk assets.

To your point around where we see money move, I think we are expecting to continue to see all of this as about $8 trillion globally of cash on the sidelines. Investors have been waiting for this opportunity to step into the markets. We expect them to continue to do that, both fixed income as well as higher quality parts of equity markets.

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