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The Federal Reserve is poised to keep interest rates on hold “for the foreseeable future” and may even raise borrowing costs as central bankers wait for clarity on Donald Trump’s policies, bond fund giant Pimco said.
Dan Ivascyn, chief investment officer of the $2 trillion asset manager, said he expected the US central bank to hold rates steady until there was “more clarity either on the data front or on the policy front”. .
Ivascyn’s remarks come as a debate is swirling on Wall Street about the future of the Fed’s rate-cutting cycle over concerns that if Donald Trump follows through on his plans to enact sweeping tariffs, it could spur 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, very positive for growth (and) productivity in the long run,” Ivascyn said in an interview with the Financial Times, adding that there was a “tension between what might make sense on long term, but lead to some pressures in the short term”.
Ivascyn said a rate hike was “certainly possible,” though not his baseline scenario, pointing to several recent surveys that had signaled a rise in consumer expectations of inflation — 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 quarterly cuts in 2025, compared to four that were forecast in September.
Fed chief Jay Powell said in December that labor market risks had receded while inflation was moving “sideways,” meaning the central bank would probably take a “more cautious” approach to cutting rates. rates this year. He also noted that some officials had begun to incorporate Trump’s planned policies into their forecasts.
The tougher outlook fueled a sell-off in US government bonds, which has left 10-year Treasury yields trading above 4.5 percent from lows of around 3.6 percent in September.
Ivascyn said Pimco had increased its exposure to government bonds to take advantage of the high yields on offer.
“The constructive view on fixed income is not based 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 high equity valuations and warned that a further move higher in Treasury yields could hit stocks.
“Relative valuations (between stocks and bonds) . . . they’re about as broad as we’ve seen in a long time,” he said. “We think that in terms of policies that can drive yields higher, they very well can drive stocks lower.”
