Pacific Investment Management Co. (Pimco), the largest U.S. active bond fund manager, believes markets are far too optimistic about the U.S. Federal Reserve’s and European Central Bank’s ability to bring inflation to heel without causing a recession.
“The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Daniel Ivascyn, Pimco’s chief investment officer, said in a Financial Times interview.
In the past, “the norm” has taken five or six quarters for the impact of rate hikes to be felt throughout the economy, he noted.
“The market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes,” Ivascyn added. “We think the market is a bit too optimistic about central banks’ ability to cut policy rates as quickly as yield curves are implying.”
As a result, Pimco, with $1.8 trillion under management, is preparing for a “harder landing” than many other asset managers, he said, which means repositioning funds to be “more defensive and more liquid” following 2022’s bond fund debacle.
At a conference in late June, the heads of the Bank of England, Bank of Japan, European Central Bank, and U.S. Federal Reserve all voiced support for higher interest rates. On 30 June, following the conference, the NASDAQ closed its strongest first half of a year in four decades.
However, core inflation in Europe and the U.S. has been stuck above 5 percent for months, more than double central banks’ 2-percent target rate, despite a series of rate increases by central banks on both sides of the Atlantic.
“It likely will be harder for central banks to cut policy [rates], even if the economy is weakening, as long as inflation is comfortably above their 2-percent targets,” he predicted.
TRENDPOST: After denying that inflation was rising in late 2020 and 2021, the U.S. Federal Reserve and European Central Bank (ECB) began lifting interest rates a year ago or more. Top-line inflation has come down, but core inflation—the measure of inflation’s breadth through the economy—has been beaten down to a much lesser degree.
If the Fed and ECB continue hiking rates based on each month’s new data, they risk pushing interest rates too high. That would drive the economy over a tipping point, sending it quickly into a recession.
After this month’s rate increase, the Fed would be wise to wait again for an indefinite period while the consumer economy looks for a bottom.
TRENDPOST: The following Trends Journal articles illustrate the incompetency of those in charge of the banking system and how they were too blind, stupid … or lying that inflation was rising and kept interest rates low so they could artificially inflate equities and economies as governments fought the COVID War:
- “SPOTLIGHT: INFLATION SPREADING” (26 Oct 2021)
- “INFLATION RISING. NOT ‘TEMPORARY OR TRANSITORY’” (26 OCT 2021)
- “WAGES, PRICES CONTINUED TO SPIRAL UPWARD IN SEPTEMBER” (1 Nov 2022)
- “SPOTLIGHT ON INFLATION” (14 Dec 2021)
- “SPOTLIGHT: INFLATION” (18 Jan 2022)
- “JANUARY INFLATION WORST IN 40 YEARS” (15 Feb 2022)
- “FROM ‘TEMPORARY’ TO ‘TRANSITORY’ INFLATION KEEPS SPIKING” (15 Mar 2022)
- “POWELL’s ‘DUH’ MOMENT: INFLATION IS TOO HIGH!” (29 Mar 2022)
- “SPOTLIGHT ON INFLATION” (3 May 2022)
- “FED HEAD WARNS OF ‘PAIN’ IN THE FIGHT AGAINST INFLATION” (17 May 2022)
- “YELLEN HALF-ADMITS SHE GOT INFLATION WRONG” (7 Jun 2022)
- “TREND TRACKING LESSON: HOW THE TRENDS JOURNAL WAS RIGHT ON INFLATION, WHILE FED, BUSINESS JOURNALISTS GOT IT WRONG” (21 Jun 2022)
- “ECONOMIC UPDATE – MARKET OVERVIEW” (15 Nov 2022)
- “ECONOMIC UPDATE – MARKET OVERVIEW” (31 Jan 2023)
- “ECONOMIC UPDATE – MARKET OVERVIEW” (14 Feb 2023)
- “WAGES AND PRICES BOTH INCREASE, PRESSURING FED TO HIKE RATE” (2 May 2023)
- “POWELL PLUNKED BY CALL FROM ZELENSKY IMPERSONATOR” (2 May 2023)
- “JOBS, WAGES BOTH RISE AGAIN IN APRIL” (9 May 2023)
- “CENTRAL BANKS’ INFLATION BUNGLE HAS COST THEM CREDIBILITY” (23 May 2023)
- “ECB WILL RAISE RATES AGAIN DESPITE SLOWER INFLATION” (6 Jun 2023)