Obviously well awaiting central bank policy responses from around the world.
Getting the RBA ANZ just now. Yeah.
Policy rhetoric from the RBA. No, I just think we're in tune with a
gentle but forceful of forecasting of how we're going to adapt to a higher
inflationary regime here and more importantly, how central banks are going
to continue to adapt to it being more data dependent, perhaps being more
pensive and elaborate, a longer adoption process.
But it doesn't necessarily always mean that you're going to get a higher rate
hiking cycle. And it probably means that we have to
not necessarily handicap the traditional reaction of weaker growth, which is
accompanied by lower rates and a more stimulative process.
So we have a balance of tasks here ahead of us over the next few quarters, which
are going to be confounding, just as you just mentioned, with the RBA.
So the task of the hand for investors and portfolio managers alike over the
next few quarters, it seems that the pandemic has just meshed with our
ability to analyze cycles in many ways. So you have data that's soft, you have
labor data in the US, for example, that's quite strong.
What do you think the assumptions, what are we what are we assuming that's
wrong? Well, I think one of the practice
practicalities is, is that we're getting back to an economy perhaps, and maybe
central bank policies which are reflective of a non stimulative era.
We are getting back to a pre global financial crisis, monetary policy
regime, one where, yes, we have had responses which cut off the left tails
of risk but may not be as elaborate, detailed or likely as they once were.
Just past the global financial crisis said more simply, When we get to the
point where this atrophy of inflation doesn't necessarily happen as quickly as
central bankers or even investors think, we may not necessarily have the
accommodation at hand that that might come along from central banks, whether
it's the Fed or other places. So perhaps it's just a reversion back to
the old regime of one where we have higher cost of capital, where we have to
take into account more data dependent Fed and other central bank policy
reactions, which means ultimately the insulator, the reduction of volatility
within marketplaces that we've become so accustomed to over the past decade or so
is actually being removed, which creates opportunities, but also uncertainties
over the foreseeable future. So likely at PIMCO, we're thinking that
the marketplace is right for a more defensive posture over the foreseeable
future, one that we might actually stay here.
The potential is for us to stay here at these higher rates for longer and not
necessarily embrace rate cuts as quickly as the market suspects over this point
in time. And so that just simply means that the
soft landing scenario is not one that we at PIMCO really adapt to In the short
term. We want to be more constructive, more
defensive focus on more liquidity in portfolios as such.
Jerome, you said that we may not necessarily see rate cuts.
How about rate rises? We heard from Meredith saying, you know
what, the risk of doing too little outweighs the risk of doing too much.
I mean, does seem like this is a Fed that's willing to tighten until
something breaks. Yeah, I don't I think what you're seeing
in observing is the debate within the Fed.
It was pretty remarkable at the last Fed meeting, simply that we had a consensus
vote. There was no outliers.
There is no non consensus attendees in that regard.
And we might very well happen to have the same thing in July, even though we
do get a rate increase. But what I think you're having is a
healthy discussion of the destination. Perhaps we are getting closer to the end
of that rate hiking cycle, recognizing the fact that the real question at hand
is not how much to tighten, but at what extent do the lags actually take place
with the tightening that has already occurred.
And that's really the focal point of the Fed debate at this point in time, is
that we might see disruptions, perhaps a little more volatility that may elicit
as the dependent Fed gets more and more involved in this more tightening process
or perhaps less of a cut, likelihood of a cut in 2024 as 2025 as the market
suspects. And that really is the is the culprit at
hand or really is the thing to be reconciled between market expectations
and ultimately the Fed's expectations of where they want and where they think
that inflationary expectations are ultimately going to reside.
Simply put, this PCE number tomorrow is the CPI number tomorrow, rather, and
today in the US is going to be very important and really particularly
focused on that core number that is moving from 5.3 to 5%.
Let's put it behind us. While it's still showing the right
direction, it's still well above the targets that the Fed wants to embrace at
this point in time, which means that the likelihood of of embracing growth or
supporting growth is probably further out of the money than most people
suspected this point in time.