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Persistent inflation and strong U.S. growth have left Federal Reserve rate cut hopes “off track,” Bridgewater’s Bob Prince said on Tuesday, adding an influential voice to the growing chorus of whether U.S. rates will start falling this year. ‘year.
“So far, this year is not unfolding the way the Fed – or the interest rate markets – describe. I think it’s clear that the Fed is off track now. The question is, how far off track are we,” Prince, co-head of investments at the $112.5 billion hedge fund, told the Financial Times.
His comments came as Atlanta Fed President Raphael Bostic told Yahoo News that if progress on inflation stalls and economic growth remains strong, it’s possible the U.S. central bank might not cut rates at all. interest rates this year. Bostic is a voting member of the Federal Open Market Committee.
Investment giant Vanguard last month said it no longer expects the Fed to cut interest rates this year, while JPMorgan Chief Executive Jamie Dimon, in his annual letter to shareholders this week, said that government stimulus could mean rates and inflation remain higher than markets expected.
Traders in the futures market reduced their expectations for how many rate cuts the Fed will make this year, from six or seven in January to between two and three as inflation data arrived hotter than expected.
The Bureau of Labor Statistics will release consumer price inflation data for March on Wednesday, which could further influence investor expectations. Economists surveyed by Bloomberg expect the main rate to rise to 3.4%, while the core rate will fall to 3.7%.
After raising interest rates to their highest level in 23 years, the Fed said late last year it had done so. In their December dot plot – a survey of officials’ expectations for inflation, growth and interest rates – Fed members indicated they have seen a slowdown in growth and inflation and expect cuts of three-quarters of a point as a result to rates this year.
Although inflation data has been stronger than expected since then, the Fed’s March dot plot reaffirmed its expectations for three cuts, even as officials raised their outlook for inflation and growth this year .
“The summary of economic projections is an if/then statement. If inflation and growth are at certain levels, interest rates can be lowered. None of the ifs are true right now,” Prince said.
For this reason, Prince said he sees “no reason to move from cash to long-term bonds at this time.”
Rates on Treasury bills are much higher than those on long-term Treasuries, he noted, and investors aren’t being paid much for taking on the additional risk of holding longer-dated bonds. Investors betting that interest rates won’t fall anytime soon would have no reason to abandon cash, she said, “because there is not yet an adequate risk premium in assets over cash.”
The only reason to cut rates at current levels of growth and inflation would be if there was a big productivity boost in the economy – whether from a surge in immigration or another big increase in labor force participation – which would allow to the United States of having non-economic resources. inflationary growth, Prince said.