Champion Hedge Fund: The Federal Reserve will absolutely not cut interest rates this year

Last year's champion of the U.S. hedge fund performance, Discovery Capital Management, believes that the Federal Reserve is unlikely to cut interest rates this year, while U.S. stocks face the risk of a short-term correction.

On July 1, Robert Citrone, founder and portfolio manager of Discovery Capital Management, issued a warning on a media program that due to the severe disconnection between market expectations for Federal Reserve rate cuts and economic reality, coupled with renewed trade frictions, the S&P 500 index may face a correction in the short term. However, he also predicts that driven by domestic investment and consumption, the U.S. economy will usher in a "prosperity" next year, and real investment opportunities may be emerging on the other side of the globe—Latin America.

Citrone clearly stated that the market's general expectation of two rate cuts within the year is "very dangerous," and he believes that the Federal Reserve "absolutely will not" cut rates this year. He pointed out that core inflation data remains stubborn, expected to rise from the current 2.8% to 3.5% by the end of the year, which undermines any rationale for rate cuts.

This judgment sharply contrasts with mainstream market views and forms the core logic of his bearish outlook on U.S. stocks in the short term. Citrone believes that this misalignment of expectations, combined with "difficult" trade negotiations with economies like Europe and Japan, will bring turbulence to the market. He likened it to a "mini-April," suggesting that the market will experience previous volatility again.

Despite his cautious short-term outlook, Citrone is extremely optimistic about the long-term prospects of the U.S. economy. He believes that the current economic slowdown is merely a "false impression" caused by policy uncertainty and expects that next year the U.S. will experience a "prosperity" driven by the return of manufacturing and consumption stimulus policies. Meanwhile, he pointed out that the attractiveness of dollar assets is relatively declining, prompting global capital to turn its attention to more cost-effective overseas markets.

Market's Rate Cut Expectations Too High, Federal Reserve in a Dilemma

Citrone believes that the biggest risk point in the current market lies in the misinterpretation of monetary policy. He stated:

The market is digesting more than two rate cuts, while I believe there will be no rate cuts this year.

He explained that the key supporting his "zero rate cut" judgment lies in the stickiness of inflation. Citrone pointed out that since the COVID-19 pandemic, the $2.5 trillion injected into the economic system by the U.S. has not been fully withdrawn, leading to persistently high inflation.

Data from Discovery Capital Management indicates that the core inflation rate will reach 3.5% by the end of the year. In this context, he believes that Federal Reserve Chairman Powell's insistence on the current course is correct and hopes that Trump will stop publicly criticizing the independence of the Federal Reserve.

Regarding the market's expectation that there will be rate cuts in April or May next year due to personnel changes, Citrone bluntly stated it is "very dangerous" and emphasized that the Federal Reserve needs to independently fulfill its responsibilities.

Short-term Trade Frictions Add Disturbances, Long-term Outlook for U.S. "Prosperity" Remains Positive

In addition to the divergence in monetary policy expectations, trade issues are another short-term disturbance that concerns Citrone.

Citrone described the current tariff issues as "tricky" and "chaotic." Although he supports a tough stance to achieve fair trade, he also acknowledges that the process will not be "smooth sailing." He expects these trade negotiations to continue to bring uncertainty to the market.

However, from a longer-term perspective, Citrone believes that these tough trade policies are fostering positive structural changes.

He observed that, due to the impact of tariffs, some companies have begun relocating production lines back to the United States or expanding their capacity in the U.S. He cited conversations with industrial park managers who stated that their facilities are fully rented out.

In addition, he anticipates that a significant "Big Beautiful" tax bill will greatly stimulate consumption among low-income groups. This bill will provide tax refunds for retirees and exempt tips and overtime income from taxes.

Citrone added that these refunds will be available around March or April next year, and once the public realizes this, consumer spending will kick in. The dual drivers of investment and consumption lead him to believe that "this country will experience a boom next year."

Declining Attractiveness of Dollar Assets, Latin America Becomes a New Value Basin

In Citrone's view, the flow of global capital is undergoing subtle changes.

He believes that the 11% decline of the dollar so far this year is not due to market expectations of interest rate cuts, but because overseas investors, having held too many dollar assets, are beginning to hedge, while U.S. investors are also starting to look overseas.

He illustrated the misalignment of value with a vivid example: the daily market value fluctuation of Nvidia is equivalent to twice the market value of the entire Mexican stock market. He emphasized:

There are so many opportunities outside the U.S., I believe investors will seize them.

Citrone is particularly optimistic about Latin America. Compared to U.S. assets, the valuations in the Latin American market appear extremely low, becoming a new value basin. He stressed that investing in emerging market countries is like investing in a company, where "management is key," and the "management" of a country refers to its policymakers.

Argentina is his best case. The country has undergone a significant shift from "the worst left-wing socialist policies" to "economic policy gold standard." This fundamental policy shift has led to a "massive revaluation" of asset prices: the stock market has risen by 4,400%, and bond prices have doubled.

He expects similar stories may unfold in other Latin American countries. In the next 15 months, Peru, Colombia, Chile, and Brazil will hold important elections, and he anticipates that the left-wing governments in these countries are likely to be replaced by center-right governments.

However, he is cautious about Brazil, as the current president Lula still has a chance to win and may implement a large number of "populist policies" during this period.

Therefore, his strategy is to increase positions when the Brazilian market corrects, while he has already established positions in countries like Argentina and Peru