Pimco’s Clarida says market bets on March US rate cut make sense

(Bloomberg) – Former Federal Reserve Vice Chairman Richard Clarida said market bets on U.S. interest rate cuts in March are understandable given a scenario where there is a “soft landing” and the central bank is confident that it has brought inflation under control.

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“A reduction in March or at least a strong indication at the March meeting that reductions are imminent, you know, makes sense,” Clarida, who is now a global economics adviser at Pacific Investment Management Co., said in a statement. interview in Singapore.

At the same time, Clarida said economic momentum could change, with a faster slowdown in inflation heralding the prospect of rate cuts, while lingering price pressures could delay them much later in the year. or even further.

Clarida’s comments come as investors debate when the Fed is likely to ease monetary policy and whether or not the world’s largest economy can emerge unscathed from the most aggressive rate hike cycle. since the 1980s. Swap markets indicate that another quarter-point rise this month is a virtual certainty, while the first 25-basis-point cut is expected to occur by the end of March.

Treasury markets have been skewed this year, with bets alternating between expectations of a Fed pivot on the one hand, and yet more rate hikes on the other.

10-year Treasury yields are expected to move in a range of 3.25% to 4.25% this year, Clarida said. Benchmark yields slipped one basis point on Monday to 3.83%.

“Ten-year yields are going to be driven by both underlying momentum and inflation, but that in turn will drive underlying Fed momentum,” he said. “I think a break below that level will be sensitive not only to inflation, but also to our position in the cycle.”

Here are edited excerpts from a Q&A with Clarida, including some from a Bloomberg Television interview:

Bond betting

With US 10-year yields where they currently sit, really in the middle of that range, our risk budgets are really allocated to other opportunities to add alpha – whether or not exposure to credit or particular currencies, or mortgage securities, for example.

As rates would move either up the range or down the range, we might consider taking more of an over or underweight duration, but that’s not really the overall goal here. .

Beware of “mission accomplished”

Quite frankly, the Fed – many times over the past few years, including when I was there – got burned when they looked at improving data and extrapolated it. So I think this committee will certainly be reluctant to declare “mission accomplished” and victory, but clearly they would rather have data like last week than some of the numbers we were getting earlier in the year.

Direction of the dollar

We had the combination of a very hawkish Fed that tends to support the dollar, and before that we had the pandemic meltdown that would have triggered a flight to quality. And now the collapse of the pandemic is behind us and the Fed may be on the verge of ending inflation hikes and falls. All three would point in the direction not necessarily of a weak dollar, but of a depreciating dollar. It is not surprising that we are seeing a reversion to the mean of the dollar.

BOJ View

Bank of Japan Governor Kazuo Ueda stressed continuity. He pointed out in some of his comments that while inflation is now above the 2% target, their own analysis is that core inflation is slightly below 2%. So if anything, it skews a bit in the dovish direction, keeping the policies in place.

–With help from Haidi Lun and Shery Ahn.

(Updates with the current 10-year Treasury yield)

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