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Bond funds giant Pimco said the Federal Reserve is preparing to keep interest rates on hold “for the foreseeable future” and could also raise borrowing costs, as central bankers wait for clarity on Donald Trump's policies.
Dan Ivaskin, chief investment officer at the $2 trillion asset manager, said he expects the US central bank to keep interest rates steady until there is “more clarity both on the data front and on the policy front.”
Ivaskin's comments come as there is debate on Wall Street about the future of the Fed's rate-cutting cycle due to concerns that if Donald Trump follows through on his plans to enact sweeping tariffs, it could lead to higher inflation at a time when the US economy has proven more resilient. Than expected.
“A lot of the policies that are being introduced could be very positive for growth (and) productivity in the long term,” Ivaskin said in an interview with the Financial Times, adding that there was a “tension between what might make sense in the long term.” “In the long term, but it leads to some pressures in the short term.”
Ivaskin said interest rate increases are “certainly possible,” although not his base scenario, pointing to several recent surveys that have indicated an uptick in consumer inflation expectations — often a leading indicator.
“We are not out of the woods yet from an inflation perspective,” he said.
The Fed cut interest rates by a full percentage point last year, but officials in December expected only two quarter-point cuts in 2025, compared to the four cuts that were expected in September.
Federal Reserve Chairman Jay Powell said in… December Labor market risks have diminished, while inflation has been moving “sideways”, meaning the central bank is likely to take a “more cautious” approach to interest rate cuts this year. He also noted that some officials have begun incorporating Trump's planned policies into their forecasts.
The tighter outlook fueled a sell-off in US government bonds, leaving 10-year Treasury yields trading above 4.5 percent from lows of 3.6 percent in September.
PIMCO is increasing its exposure to government bonds to take advantage of the higher yields on offer, Ivaskin said.
“The constructive view on fixed income does not depend on the Fed cutting further from here,” Ivaskin said.
Federal Reserve policymakers meet for the first time this year on January 28-29, but are widely expected to keep interest rates unchanged until at least the summer.
Ivaskin also noted rising stock valuations and warned that a further move higher in Treasury yields could weigh on stocks.
“Relative Valuations (Between Stocks and Bonds).” . . “It's as wide-ranging as we've seen in a long time,” he said. “We think that policies that might cause yields to rise very well may cause stocks to fall as well.”
