For Clarida (Pimco), the “disconnect” between the markets and the Fed is essentially based on inflation projections

(Boursier.com) — According to Richard Clarida, global economic adviser to Pacific Investment Management Company (Pimco) and former vice-chairman of the US Federal Reserve, the Fed should proceed with a further rate hike at the next meeting of the month of July, while the central bank, which has just left its main key rate at 5-5.25%, stressed on Wednesday that inflationary pressures continued to be strong. “The projections from the last meeting of the Fed’s monetary policy committee created a surprise by anticipating a hike in key rates of 50 basis points by the end of the year, corresponding to two further hikes of 25 bps , the next of which probably in July,” he said on Friday during a presentation to the French press of Pimco’s “secular outlook,” the work of five-year economic projections that the company carries out each year. .

“For their part, the markets were anticipating an additional rate hike, probably at the July meeting, before the arrival of a pause… This “disconnect” (“disconnect”) between the markets and the Fed isn’t new and we’ve seen it a lot this year. Until the end of May, markets were expecting the Fed to start cutting rates in September, even as all members of the FOMC had officially stated that the Fed would not cut rates this year,” Clarida recalled.

matter of rhythm

“I think this disconnect is mostly due to different expectations for inflation to slow. Markets think it’s going to slow faster than the Fed is anticipating,” he added.
Last Wednesday, the Fed’s core inflation forecasts were revised upwards. The Federal Reserve, which in March forecast core inflation at 3.6% in 2023, now expects it at 3.9%.

According to the Fed’s “dot plot”, twelve of the 18 members of the monetary policy committee anticipate a rise of 50 basis points as an appropriate target for Fed Funds at the end of 2023. The markets are betting on a slightly more accommodating turn. According to FedWatch’s statement on Friday, only a minority of traders (just over 7%) are betting on such a rise. Nearly 50% expect a single 25 basis point hike…