U.S. stocks have risen, but the Federal Reserve seems unable to rejoice, with the possibility that it may not cut interest rates at all this year?

The current frenzy over artificial intelligence (AI) in the U.S. stock market could make it difficult for the Federal Reserve to cut interest rates this year. This is the view of Torsten Slok, Chief Economist at Apollo Global Management.

According to Slok, the Federal Reserve may not cut interest rates at all this year, even though officials have indicated a 75 basis point cut in 2024 in their dot plot.

His perspective is partly based on the frenzy caused by the U.S. stock market bubble, with investors still attracted to the hype surrounding AI companies like NVIDIA (NVDA).

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Last Friday, Slok stated, "We are absolutely in an AI bubble, and its side effect is that when tech stocks rise, it eases financial conditions. This makes the Federal Reserve's job more difficult."

Loose financial conditions run counter to the Federal Reserve's policy tightening goals, with officials still closely monitoring inflation and asset prices.

The federal funds rate is at its highest level since 2001. Although the inflation rate has cooled significantly from its peak in the summer of 2022, prices still hover above the Federal Reserve's 2% target, with the CPI rising 3.2% year-over-year in February.

After Federal Reserve Chairman Powell has shown some dovishness, Slok maintains his view. He responded, "The story is the same.

Since the dovish turn by the FOMC last December, loose financial conditions have triggered significant tailwinds for consumer spending, financial markets, and capital markets, leading to a re-acceleration of growth and inflation, and may keep the Federal Reserve's interest rates higher for a longer period. Strong inflation and employment data in January and February indicate that the last mile of inflation is much more difficult."

Slok and other economists warn that inflation could remain high for a longer period, which means the Federal Reserve may postpone its rate cut schedule until 2025.Top economist Mohamed El-Erian recently warned that supply chain pressures are still lingering in the economy, suggesting that inflation may be more sticky than in the past.

Slok said that assuming economic growth continues to accelerate, the Federal Reserve could even resume interest rate hikes later this year. According to the latest GDPNow forecast from the Atlanta Fed, the U.S. GDP is expected to grow by 2.1% this quarter.

Slok added that higher long-term interest rates also mean that the Federal Reserve faces the risk of causing fluctuations in the "financial system."

He was referring to the high debt burden in industries such as commercial real estate. Higher borrowing costs could lead to bankruptcy for some debtors, potentially leading to more regional banking troubles. Speaking about the possibility of the Federal Reserve resuming interest rate hikes, he said:

"Although this is not my base case at all, it would be the 'mother of all pain,' and no one is preparing for this risk."