Guggenheim’s Scott Minerd Says Fed Should Hike Rates, Not Cut Them
(Bloomberg) -- The Federal Reserve should raise interest rates when it meets this week -- rather than cut them -- to keep the economy from overheating, according to Scott Minerd, chief investment officer of Guggenheim Partners.
“By almost every measure policy makers should be considering another rate hike in anticipation of potential economic overheating from looming limitations on output,” Minerd, whose firm oversaw more than $270 billion as of June 30, wrote in a commentary posted on the firm’s website Monday. “Instead, debate has been focused on the need to take preemptive action to avoid a potential slowdown.”
Fed funds futures show that traders see a quarter-point cut as a certainty for this Wednesday’s Federal Open Market Committee decision, and the market is currently pricing in around 68 basis points of easing by the end of this year. A reduction this week would be the first cut in the main benchmark range since it embarked on a series of quarter-point increases to lift its target range from a record low.
Minerd’s stance runs counter to that of many policy makers and market observers -- including U.S. President Donald Trump -- who see the need for the central bank to provide more stimulus. While the economy is in the midst of the longest expansion on record, inflation has remained persistently below the Fed’s target. Global risks and the prospect of central bank easing in other economies are also weighing on the outlook.
The specter of Fed rate cuts, and a global rally in bonds that’s taken some benchmarks in Europe to unprecedented levels below zero, have helped drag down Treasury yields, with the U.S. 10-year yield at around 2.05% on Monday.
The fund manager himself points to the risk of negative rates in Europe -- and the danger that they could eventually spill over into American markets if the U.S. were to tip into a recession that required a large-scale return to quantitative easing -- as driving the Fed toward rate cuts rather than hikes.
“As Europe faces prospects that negative rates may become a long-term fixture in the euro region, concerns are mounting in the U.S. that the global slide toward negative yields could infect the market for Treasury securities should the U.S. slip into a recession,” wrote Minerd, who serves on the Federal Reserve Bank of New York’s investor advisory committee on financial markets.
“To immunize against the global contagion of negative rates, the Fed is intentionally overheating the U.S. economy in hopes of raising inflation above its 2% target rate,” he said. “Once inflation approaches some undefined rate, perhaps 2.5%, the Fed will then reverse course by increasing rates to higher levels than we are experiencing today, creating another set of risks.”
Minerd’s $13 billion Guggenheim Total Return Bond Fund returned 3.5% this year through July 26, trailing more than 90% of its peers, according to data compiled by Bloomberg. The fund’s five-year average annual return is 4%, better than 95% of its peers.
For the Guggenheim manager, the solution to low inflation lies not in monetary policy, but in the U.S. economy’s structural issues. The simplest way to avoid recession and the associated negative rates in his view would be to bolster labor supply through immigration.
“The Fed’s current policy of anticipatory and preemptive rate cuts will lead to unsustainably high asset prices and increased financial instability,” he wrote. “This can only make the next downturn worse.”
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