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:

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