(Bloomberg) — Former Federal Reserve Vice Chairman Richard Clarida said market wagers on US interest-rate cuts in March are understandable given a scenario where there’s a “softish landing” and the central bank is confident it’s reined in inflation.
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“A cut in March or at least a strong indication at the March meeting that cuts are imminent, you know, makes sense,” Clarida, who is now global economic advisor at Pacific Investment Management Co., said in an interview in Singapore.
At the same time, Clarida said the economic dynamics may change, with a more rapid slowdown in inflation bringing forward the prospect of rate cuts, while stubborn price pressures may delay them until much later in the year or even further away.
Clarida’s comments come as investors debate when the Fed is likely to ease monetary policy, and whether or not the world’s biggest economy can emerge unscathed from the most aggressive rate-hike cycle since the 1980s. Swap markets indicate another quarter-point increase this month is a virtual certainty, while the first 25 basis-point cut is likely to come by the end of March.
Treasury markets have been whipsawed this year, with bets alternating between expectations for a Fed pivot on one hand, and even more rate hikes on the other.
Treasury 10-year yields are likely to move in a 3.25%-to-4.25% range this year, Clarida said. Benchmark yields slipped one basis point Monday to 3.83%.
“Ten-year yields are going to be driven by both the underlying dynamics and inflation, but in turn that will drive the underlying dynamics of the Fed,” he said. “I do think that a break below that level is going to be sensitive not only to inflation, but where we are in the cycle.”
Here are edited excerpts from a Q&A with Clarida, including some from a Bloomberg Television interview:
With 10-year US yields where they are now, really toward the middle of that range, our risk budgets are really being allocated to other opportunities to add alpha — whether or not that would be exposure to credit or particular currencies, or to mortgage backed securities, for example.
As rates would move either toward the top of the range or the bottom of the range, we might consider taking more of a duration over or underweight, but right here that’s not really the broad, broad focus.
Wary Of ‘Mission Accomplished’
Quite frankly the Fed — several times in the last several years, including when I was there — got burned when they looked at data that was improving and extrapolated that. So I think this committee will certainly be wary of declaring ‘mission accomplished’ and victory, but clearly they’d rather have data like last week’s than some of the numbers we were getting earlier in the year.
We had the combination of a very hawkish Fed that tends to support the dollar, and before that we had the pandemic collapse which would have triggered a flight to quality. And now the pandemic collapse is behind us and the Fed is perhaps close to done on hikes and inflation’s coming down. All three of those would point in the direction of not necessarily a weak dollar, but a depreciating dollar. It’s not surprising we see some mean reversion in the dollar.
Bank of Japan Governor Kazuo Ueda has emphasized continuity. He emphasized in some of his commentary that even though inflation now is above the 2% goal, that their own analysis is that underlying inflation is somewhat less than 2%. So if anything, that skews a little bit in the dovish direction, keeping the policies in place.
–With assistance from Haidi Lun and Shery Ahn.
(Updates with today’s Treasury 10-year yield)
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