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The Federal Reserve is poised to keep interest rates on hold “for the foreseeable future” and could even boost borrowing costs, as central bankers await clarity on Donald Trump’s policies, said bond fund giant Pimco.
Dan Ivascyn, the $2tn asset manager’s chief investment officer, said he expected the US central bank to keep rates steady until there was “more clarity either on the data front or the policy front”.
Ivascyn’s remarks come as a debate swirls on Wall Street about the future of Fed’s rate rate-cutting cycle over concerns that if Donald Trump follows through on his plans to enact sweeping tariffs, it could fuel higher inflation at a time when the US economy has proved more resilient than expected.
“A lot of the policies being introduced can be very, very positive for growth [and] productivity over the long run,” Ivascyn said in an interview with the Financial Times, adding that there is a “tension between what may make sense over the long run, but lead to some pressures over the short term”.
Ivascyn said that rate increases were “certainly possible”, although not his baseline scenario, pointing to several recent surveys that have signalled an uptick in consumers’ inflation expectations — often a leading indicator.
“We’re 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 forecast just two quarter-point reductions in 2025, compared with the four that had been projected in September.
Fed chief Jay Powell said in December that labour market risks had diminished, while inflation was moving “sideways”, meaning the central bank will probably take a “more cautious” approach to rate cuts this year. He also noted that some officials had begun to incorporate Trump’s planned policies in their forecasts.
The more hawkish outlook added fuel to a sell-off in US government bonds, which has left the 10-year Treasury yield trading above 4.5 per cent from lows around 3.6 per cent in September.
Ivascyn said Pimco has been increasing its exposure to government bonds to take advantage of the high yields on offer.
“The constructive view on fixed income is not predicated on the Fed cutting more from here,” Ivascyn said.
Fed policymakers meet for the first time this year on January 28-29, but are widely expected to keep rates on hold until at least the summer.
Ivascyn also pointed to elevated equity valuations, and warned that a further move higher in Treasury yields could hit stocks.
“Relative valuations [between stocks and bonds] . . . are about as wide as we’ve seen in a long time,” he said. “We think concerning policies that may take yields higher very well may take stocks lower as well.”
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