US Fed aware of rising inflation, need to watch for any rate action by June: Peter McGuire

It'll retest 102 and maybe even 100, and the euro has just been on an all-mighty trade, and so has the yen in the last couple of months.

The US Federal Reserve may have to keep a cut in the benchmark rate on hold for longer than expected owing to inflationary concerns, geopolitical uncertainty and President Trump’s looming reciprocal tariff, Peter McGuire, CEO of XM Australia said. With US economic growth slowing and unemployment figures under scrutiny, rate cuts in 2025 may be delayed, Peter McGuire said in an exclusive interaction with Moneycontrol.

He also contrasted India’s strong GDP and long-term growth potential with China’s economic struggles. XM is a global investment firm that operates as a market maker, enabling trading in currencies, equity indices, precious metals, and energy markets.

Edited excerpts:

What are the key takeaways from Powell's speech according to you, and what stood out for you?

The Federal Open Market Committee (FOMC) voted to keep the interest rate in the range of 4.25-4.50%. Inflation is starting to rise, and Fed Chair Powell is very conscious of this. So are we going to see additional rate cuts, or none this year? This is a great challenge moving forward because you've got lowering economic activity. That is concerning from a GDP perspective. Also, President Trump's tariffs are adding to the concerns. He's going to wrestle with these concerns over the next matter of months from a policy perspective.

So how does today's decision shape expectations for rate cuts in 2025? According to you, has the timeline shifted?

I think it certainly has, and it is due to two reasons: Firstly, because of the fears of high inflation resulting from a rate cut, as the FOMC doesn't want to spur on more inflation. Secondly, unemployment numbers will be examined closely over the next few months to see what the appetite of the Fed is, in the sense of any opportunity or possibility of a rate cut.

Does the Fed's approach suggest concerns about inflation persistence, or is it more about economic resilience?

Consumption is the great challenge here. Even when you listen to the likes of Treasury Secretary Scott Bessent, he feels as though we're going to see a detox period, and that's going to be introduced to the economy very shortly. That doesn't sound good. It is likely to impact consumption, and then the next part naturally would be inflation. I wonder how that navigates across the consumption patterns of consumers. If it's going to be soft, then that's not a good sign for companies as well as the overall economy.

With Trump's tariff policies looming, could the Fed be forced to stay on hold for longer? When do you expect the next rate cut to come by?

I want to see if there's any chance that there could be a rate cut by the end of the second quarter, towards the end of June. Maybe you might see something by then, but if you don't see something by then, you might see something later. But this is the issue: What is inflation going to smell, taste, and look like by the end of the second quarter? Which is still the best part of 15 weeks away, and that's a long time in the economic cycle.

From a tariff perspective, President Trump is probably going to push very hard because he wants to emulate the tariff king, William McKinley, the President in the 1880s and 1890s. He is concerned and wants to create an external revenue service.

When I listen to the likes of Treasury Secretary Scott Bessent or Commerce Secretary Howard Lutnick, they're very focused on: one, a detox; secondly, an introduction of an external revenue service. They want to, in President Trump's words, abolish income tax. This is going to be revolutionary. Its impact needs to be watched over the next three to six months. It's going to be a time like no other.

It seems like a catch-22 situation for the Fed—if slower growth pushes up unemployment, they may need to cut rates. But if inflation inches back towards 3 percent, they'll have to keep the rates elevated. How do you think the Fed will navigate this dilemma?

They're not in front of the train; they're behind the train. At the moment, it's playing catch-up. The uncertainty from a tariff perspective, inflation, and geopolitical tensions—so many moving parts are yet to be really put in place. Inflation is much more concerning.

While officials see inflation moving up this year more rapidly than previously expected, the Fed expects the trend to be short-lived. The last time the Fed thought inflation was transitory, it backfired. What do you think are the chances of history repeating itself?

Bank of America coming out and saying inflation by mid-year is going to be at 4.6%, the University of Michigan saying 4.9%—these are all frightening statistics. It will be difficult for the Fed to maneuver and manage.

How do you see global funds shifting after this decision and the impact on emerging markets like India?

It depends on one's risk perspective. You're earning four and a half, you've got a good yield on the 10-year bond, and you need to be in economies that are going to be significantly better than the risk-free rate. All that would translate into the likes of India, but not the likes of China. In the case of India, they have a very strong GDP, and the opportunities associated with those particular industries or sectors of the market have the capacity to improve. One's very conscious of what India is living through, in terms of an infrastructure boom. I don't think that's going to stop anytime soon. India is going to perform very well. There’s that fairly young population, along with entrepreneurial zeal, incredible technology, and it is magnificent geographically.

Don’t discount that you've got a very hungry population that wants to improve and come up a consumption curve—not mature. America is already a mature market, but India is not. That's where the opportunities are. I don't think that's short-lived. I'd say that that is very much over many decades to come.

Given the recent correction in India, do you think valuations are now attractive, or do you think Indian markets need to correct further for valuations to align with earnings?

If they come to the market and it comes down further, that's going to make the stocks even more attractive. If America goes, let’s say, two and a half thousand points from its peak, then one’s got to be cautious. It's going to pull every market down. One's got to be very mindful that we've seen the most incredible rally in precious metals, and I don't think there's any nation that regards gold as such a big part of the family portfolio. The price is now at USD 3,060 an ounce. That appetite is not waning. People are flocking to that safety net, which is gold, and I think that's only going to continue. There's obviously a large percentage of the market, regardless of what I think, that is fearful of the current geopolitics and economic cycle globally.

There’s a lot of debate about China and India. Chinese markets have also corrected quite substantially. Is it looking more attractive, and where do you think FIIs will allocate funds when it comes to emerging markets?

China's an interesting case. It requires massive stimulation and a bazooka basically to re-engage consumption. It's had a nice rally up, and there’s no short. But the overall picture is they've got a massive overhang when it comes to property. The unemployment sector is very much a concern from a manufacturing base.

What President Trump is prepared to do is re-engage all companies that are making products in China to bring them back home to America. They're going to give huge incentives now, and if they don’t, there are going to be massive tariffs on those corporations, and they may go bankrupt. So China's not looking attractive unless they can really get huge internal demand. And if Howard Lutnick is correct that he wants to abolish income tax, that's going to make the US consumer more robust. They’re going to have significantly more money.

The dollar index is stuck between 103 and 104 for now. It has come down significantly from the 110 handle. What’s the trajectory looking like from here?

What we've experienced over the last three months is that we were running at that 110 handle. It's been an incredible sell-off. You'd have to be thinking of a 102 handle—maybe you go to test the lows that you saw going all the way back to July 2023. I'm just looking at the chart here, or even the later part of July 2024, when it was at that 101-102 handle. It'll retest 102 and maybe even 100, and the euro has just been on an all-mighty trade, and so has the yen in the last couple of months.

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