Richard Clarida, former Vice Chairman of the Federal Reserve and Global Economic Advisor to Pacific Investment Management (PIMCO), stated on Thursday that in the context of a resilient US economy, the Federal Reserve may have to further raise interest rates to combat stubborn inflation.
Since the summer, the progress in fighting inflation has been stagnant, and we have not seen a weak labor market, "Clarida said at an investment conference.
However, he also emphasized a glimmer of hope, "The good news for the Federal Reserve is that inflation expectations are quite stable
According to data released by the US Department of Commerce's Bureau of Economic Analysis on Thursday, the initial reading of the US gross domestic product (GDP) for the third quarter was 4.9%, a new high since the fourth quarter of 2021. The expected market growth rate is 4.7%, with a previous value of 2.1%. This proves that the US economy is quite resilient.
The driving force behind the surge in US bond yields
The surge in treasury bond bond yields in recent weeks has prompted investors to reduce their bets that the Federal Reserve will raise borrowing costs in the coming months.
According to data compiled by the media, swap traders expect the Federal Reserve to raise interest rates by only 8 basis points at its meeting in January next year, which is in line with the expected policy peak. The latter suggests that the possibility of another 25 basis point hike is about 32%.
Clarida said that earlier this week, the US treasury bond bond market suffered a sell-off, pushing the yield of 10-year treasury bond bonds to exceed 5% for the first time since 2007, which reflects a variety of driving factors, including bond supply, the end of quantitative easing, and the Federal Reserve Chairman Powell's assertion that "interest rates should be kept at a higher level for a longer period of time".
Clarida reiterated Powell's firm commitment to maintaining high interest rates and the consensus he obtained from the committee. Clarida asserts that maintaining bond yields at current levels for a long time will inevitably have an impact on the country's economic performance.
However, he also pointed out that the transmission of monetary policy to the broader economy is evolving, and emphasized the trend of corporate debt relief and consumers locking in lower 30-year fixed interest rates.
Greater challenges facing the Federal Reserve
Clarida pointed out that the greater challenge facing the Federal Reserve may be deciding when to start cutting interest rates. He said that even if inflation has not yet fallen back to the target level of 2%, the Federal Reserve may consider lowering interest rates.
The interesting part of the discussion is that the Federal Reserve led by Powell began cutting interest rates, but inflation did not return to 2%, "Clarida said. Powell may want an inflation rate of 2.1%, but it could also be 2.6% or 2.7%. By next summer, if we reach there, the Federal Reserve can consider lowering interest rates and doing so before inflation returns to 2%. The question is, will this happen in early 2024 or later when inflation proves more sticky
Regarding the strength of the US dollar in recent years, he pointed out that once the Federal Reserve lowers interest rates, the interest rate spread will narrow and the US dollar will return to a more normal level.