NEW YORK (Reuters) - Federal Reserve policymakers have no reason to change U.S. interest rates anytime soon but will startle global markets by resuming rate hikes rather than pivoting to cuts, according to a leading Wall Street money manager.
Scott Minerd, who helps manage $260 billion as global chief investment officer for Guggenheim Partners, said on Tuesday in an interview in the Reuters Global Markets Forum online chatroom that U.S. consumers would soon step up spending and lift inflation later in 2019.
The following are excerpts from the chat:
Question: Do you expect to see an uptick in inflation in the United States?
Answer: Year-over-year comparisons on inflation will accelerate in the second half of the year. Ultimately, by ... 4Q, it is likely that growth will be higher than potential and signs of inflationary pressure will return.
Q: What will drive inflation?
A: Energy will show a strong rebound in the wake of rising oil prices and service-sector inflation will continue to accelerate as a result of the tight labour market.
Q: Most investors appear to believe the Fed has ended its campaign of raising interest rates. Do you?
A: I would expect that the probability that a rate hike would be the next move by the Federal Reserve is greater than 75 percent. Obviously, the market is placed for a cut. I would expect a hike in the winter.
Q: What are the risks?
A: Given the current low-risk premium on both stocks and bonds, it appears that the market is beginning to price for perfection. Ultimately, the rise of inflationary pressure will force the Fed to induce a recession. Given the high level of corporate leverage, the next economic downturn will cause outsized losses for both stocks and bonds.
Q: Which assets do you recommend for investors seeking shelter?
A: High-quality securities like U.S. agency CMBS (commercial mortgage-backed securities) and short average life AAA and AA CLOs (collateralised loan obligations). These provide a fairly attractive return relative the cash.
Q: When do you expect the long-running U.S. expansion to end?
A: While we originally anticipated that a recession could arrive as early as the first half of next year, the recent Fed pivot may push the recession out to 2021.
(This interview was conducted in the Reuters Global Markets Forum, a chatroom based on the Eikon platform.)
Reporting by Michael Connor in New York; editing by Jennifer Ablan and Diane Craft