While the Federal Reserve is likely to deliver their last rate hike of the cycle next week, a better course of action would be to tap the brakes, according to DoubleLine Capital’s Jeffrey Sherman.
(Bloomberg) — While the Federal Reserve is likely to deliver their last rate hike of the cycle next week, a better course of action would be to tap the brakes, according to DoubleLine Capital’s Jeffrey Sherman.
“I think they should pause,” Sherman said on Bloomberg Television. “The old saying is that the Fed hikes until they break something. I think it’s obvious that something broke here.”
The sudden collapse of Silicon Valley Bank along with the failure of two other US lenders in the past week shows that the tightening the Fed began last year is having the intended effect, Sherman said, adding that it’s still more likely that Fed Chair Jerome Powell will deliver another 25 basis-point hike next Wednesday.
That’s in-line with bond traders pricing a quarter-point hike is more likely than not. Meanwhile, banks such as Goldman Sachs Group Inc. and Barclays Plc have scrapped their calls for an increase altogether.
“I think the Fed wants to stay on this path to say they are committed to being an inflation fighter,” Sherman said. “This is a chance for Jay to get one last hike in. I think they will deliver that hike on Wednesday absent some massive development to the downside.”
The Treasury market has been the epicenter of market volatility over the past week. The two-year Treasury yield plunging more than 70 basis points lower to break below 4%, after piercing above 5% last week for the first time since 2007.
Read more: Treasuries Front-End Extends Rally as March Hike Premium Eases
Before the banking turmoil shook the financial world, early last week Powell gave a hawkish warning before the Senate Banking Committee, underscoring the Fed’s commitment to fighting inflation. That prompted bets in the swaps market to lean toward a half-point hike at their March meeting.
Sherman echoed the view of DoubleLine Capital’s Jeffrey Gundlach who also expects next week to be the last rate hike for the year. Gundlach told CNBC this week anything higher than a 25 basis-point rise could damage the central bank’s credibility.
Read more: Jeffrey Gundlach Predicts Fed Will Pause Rate Hikes After March
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