US Fed set for slow easing, but expert warns new chair could trigger 15 percent market correction

The US Federal Reserve appears to be on a path of slow monetary easing, but markets could face heightened volatility from policy shifts at the Bank of Japan and the historical market reaction to a new Fed chair. In an interview with CNBC TV18, Ed Clissold, Chief US Strategist at Ned Davis Research, shared his outlook on global central bank actions and their implications for US equities.

Clissold stated that a 25 basis point rate cut from the US Fed is now "pretty much baked in." He highlighted a significant shift in the Federal Open Market Committee's (FOMC) dynamics, moving from a consensus driven by the chair to a more vote-dependent body. "Now it's almost like a corporate board, you have to count votes and it appears now there's enough votes for a cut," he said. He foresees a continued trajectory of "slow easing," with the possibility of another cut within the first three meetings of 2026. This easing stance in the US presents a challenge for other central banks, particularly the Bank of Japan. Clissold warned that if the BoJ hikes rates too aggressively while the rest of the world is cutting, it could disrupt the Yen carry trade and induce market volatility, although he does not believe it would be enough to end the current bull market.

Despite concerns about an "AI bubble," Clissold confirmed that his firm has maintained its overweight position on US technology stocks for the past six months. The rationale, he explained, is rooted in the prevailing slow-growth environment. "About 12% of S&P 500 companies are growing sales faster than 15%. That's half what we've gotten in the past. And so investors are going to pay a premium for the companies that can deliver the growth, and that's the tech sector," he commented. While acknowledging that valuations are stretched, with the relative price-to-earnings of the 'Magnificent Seven' reaching levels that have historically led to pauses, he believes the long-term growth story remains the primary focus for investors.

Looking ahead, Clissold pointed to a significant historical trend: the market's reaction to a new Federal Reserve chair. Citing data from the early 1900s, he noted that, on average, the market experiences a 15% correction within the first six months of a new chair's term. He described this phenomenon as the market "testing the new Fed chair," recounting the large drawdown in December 2018 when Chair Jerome Powell initially resisted market calls for faster rate cuts.

For the next Fed chair, a clear potential issue looms: the question of Fed independence. Clissold cautioned that if more rate cuts are implemented without a substantial drop in inflation, it could unanchor long-term inflation expectations. Such a scenario could trigger a widening of credit spreads and a steepening of the yield curve, creating a "politically a very tricky situation" that the US has not had to deal with in 50 years, since the tenure of Arthur Burns in the early 1970s.