PIMCO’s Richard Clarida said that with the U.S. economy buoyant, the Fed may have to raise interest rates further to combat stubborn inflation.
“Inflation progress has stalled since the summer and we have not seen labor market weakness,” the former Fed vice chairman told Tom Keane at the Bloomberg “Future of Fixed Income” conference in New York on Thursday. .” “The good news for the Fed is that inflation is expected to be quite stable.”
A surge in U.S. Treasury yields in recent weeks has prompted investors to abandon bets that the central bank will raise borrowing costs in coming months. Data compiled by Bloomberg show that swaps traders expect a further 8 basis points of tightening at the central bank’s January meeting, which would correspond to an expected policy peak and mean there is about a 32% chance of another 25 basis point hike.
Clarida said the sell-off in the Treasury market earlier this week, which pushed the 10-year Treasury yield above 5% for the first time since 2007, reflected a variety of drivers, including bond supply, the end of quantitative easing and ” Jay Powell’s Long-Term Higher” news.
Clarida noted that the Fed chairman “is redoubling his efforts to raise long-term interest rates and has a committee supporting him.” “The longer bond yields remain at these levels, the more we will see the impact of these rates on the economy.”
However, he was quick to point out that the transmission of monetary policy to the broader economy was evolving, noting that businesses had “unpaid debt and consumers locked in low 30-year fixed rates.”
Pimco Global Economic Advisors noted that the bigger challenge for central banks may be deciding when to start cutting interest rates.
“What makes the discussion interesting is that the Powell Fed started cutting interest rates and inflation didn’t get back to 2 percent,” he said. “Powell wants 2.1%, but it could be 2.6%, 2.7%. If it gets to next summer, the Fed could consider lowering interest rates and take action before inflation gets to 2%. The question is, will that happen?” Does it happen in early 2024, or does it happen after inflation becomes sticky.”
As for the U.S. dollar’s strength in recent years, he noted that the U.S. dollar “does tend to have long waves every decade. Once the Fed does lower interest rates, it will narrow the spread and the U.S. dollar will return to more normal levels.”
—With assistance from Edward Bolingbroke
Svlook
