"US Rate Cuts Could Backfire"…PIMCO's Warning

PIMCO has warned that if the Federal Reserve (Fed) cuts interest rates, it could have an adverse effect due to the aftermath of the Iran war.

Reuters Yonhap News

On May 10 (local time), Dan Ivascyn, Chief Investment Officer (CIO) of PIMCO, said in an interview with the Financial Times (FT) during the annual Milken Institute Conference held in Beverly Hills, California, "Central banks need to respond cautiously," adding, "If necessary, the possibility of policy tightening should also be left open."

PIMCO is the world's largest bond manager, with assets under management amounting to 2.3 trillion dollars.

He explained that the closure of the Strait of Hormuz by Iran has led to a surge in energy prices, presenting a new challenge for U.S. policymakers who have been striving for years to lower inflation to the central bank's target of 2%. He further noted, "The United States is further away from the possibility of policy tightening, but for now, more tightening is likely to occur in Europe, the UK, and perhaps even Japan," adding, "Even in the U.S., we cannot completely rule out that possibility." This means that the possibility of a rate hike in the United States cannot be entirely dismissed.

He added that any move to lower U.S. borrowing costs would "have an adverse effect given the trajectory of inflation and the uncertainty surrounding inflation and inflation expectations." He also pointed out that such measures are very likely to result in higher medium- and long-term interest rates.

Jenny Johnson, CEO of Franklin Templeton, a U.S. asset management company with 1.7 trillion dollars in assets under management, also told FT that "it will become more difficult to control inflation" and predicted that "it will be hard for the Fed to lower interest rates."

Their remarks came amid heated debate within the Fed on how to respond to the surge in inflation triggered by soaring oil prices. The U.S. Personal Consumption Expenditures (PCE) price index recorded 3.5% in March, the highest level in about three years.

The Fed has held rates steady for three consecutive meetings. However, that decision saw the highest number of dissenting votes since 1992. In its statement, the Fed left open the possibility that the next move could be a rate cut. Accordingly, most experts see little likelihood of a Fed rate hike. In the futures market as well, investors are largely betting that the Fed will keep rates steady this year.

They also predicted that the Fed's independence would be maintained even after Jerome Powell steps down as chair. Powell will step down from his post on May 15, and on the same day, nominee Kevin Warsh will assume the chairmanship. CIO Ivascyn said, "(Warsh) will clearly seek to narrow the scope of the Fed's role," adding, "He is also likely to reduce communication regarding the entire Fed process." However, he believed that "in areas important to the market, the Fed will remain sufficiently independent." He cited "interest rate policy decisions and balance sheet management" as those areas.

CEO Johnson also commented that Warsh "will consider his long-term legacy beyond the Trump Administration," and "will try to do what he believes is right." This means that during President Trump's term, Warsh is expected to be more conscious of his long-term evaluation than of political demands.

This content was produced with the assistance of AI translation services.