The Federal Reserve is expected to maintain interest rates at their current levels for the foreseeable future and may even consider increasing borrowing costs, according to insights from bond fund leader Pimco.
Dan Ivascyn, the chief investment officer of the $2 trillion asset management firm, indicated that the Fed will likely keep rates unchanged until there is greater clarity regarding economic data or policy decisions.
His comments come amidst discussions on Wall Street concerning the Fed’s future rate-cutting actions, particularly in light of uncertainty surrounding potential tariff policies proposed by former President Donald Trump, which could lead to higher inflation, especially given the unexpected resilience of the US economy.
Ivascyn noted that while some newly introduced policies could foster growth and productivity in the long term, they might create short-term pressures. He acknowledged the possibility of rate increases, although he does not consider it his primary scenario, citing recent surveys that show an increase in consumer inflation expectations—an important leading indicator.
He remarked, “We’re not out of the woods yet from an inflation perspective.” After cutting rates by a full percentage point last year, Fed officials in December adjusted their forecast, now predicting only two quarter-point cuts in 2025 versus the four previously anticipated.
Fed Chair Jay Powell stated that risks in the labor market have lessened, while inflation trends are stable, suggesting a cautious approach toward rate reductions in the coming year. He also mentioned that some Fed officials are beginning to factor in Trump’s proposed policies into their economic outlooks.
This more aggressive stance contributed to a sell-off in US government bonds, with the 10-year Treasury yield rising above 4.5%, up from approximately 3.6% in September. Ivascyn indicated that Pimco has been increasing its investment in government bonds to take advantage of the higher yields.
“A constructive outlook on fixed income does not rely on further cuts from the Fed,” he stated.
The Fed’s policymakers will convene for their first meeting of the year on January 28-29, with expectations leaning towards maintaining the current rate until at least mid-year. Ivascyn also highlighted the high valuations in equity markets, cautioning that additional increases in Treasury yields could negatively impact stock prices. He mentioned that the relative valuations between stocks and bonds have reached levels not seen in a long time, suggesting that rising yields could lead to declining stock values.
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