ATFX - Former Vice Chairperson of the Federal Reserve: Market expectations for a rate cut in March next year are reasonable

Mr. Clarida, the former vice-chairperson of the US Federal Reserve, said it was understandable for markets to bet on a rate cut in March, given the prospect of a "soft landing" for the economy and the prospect of inflation being brought under control.

Clarida, now a global economic advisor to Pimco, said in an interview in Singapore,"The Federal Reserve next yearIt makes sense to cut rates in March, or at least to strongly signal at the March meeting that a rate cut is coming. "

At the same time, Clarida said that economic dynamics could still change, with accelerating and slowing inflation driving interest rate cut expectations, while persisting price pressures could delay rate cuts until later this year or beyond.

Treasury yields have risen sharply as the Federal Reserve raises interest rates

Ms Clarida's comments come as investors debate when the US Federal Reserve might loosen monetary policy and whether the world's largest economy can emerge unscathed from its most aggressive rate-raising cycle since the 1980s. The swap market suggests another 25 basis point rise this month is a foregone conclusion, with the first 25 basis point cut likely at the end of March.

The US Treasury market has been volatile this year, driven both by expectations of a policy shift by the Federal Reserve and by expectations of further interest rate hikes.Clarida forecasts that the 10-year Treasury yield could move in the range of 3.25% to 4.25%.

"The 10-year Treasury yield will be driven by market expectations and inflation, which in turn will drive the Fed's policy outlook," Mr. Clarida said. "I do think that going below 3.25 per cent will have an impact not only on inflation but also on the tightening cycle we are in."

Here are some highlights from Clarida's Q & A session with foreign media:

Where is the US debt headed?

Clarida said that with the 10-year Treasury yield currently in the middle of the zone, the risk budget is actually allocated to other opportunities to increase alpha, whether that involves credit or specific currencies, or mortgage-backed securities.

Note: Alpha shows the performance of an individual asset or portfolio relative to the selected benchmark. The higher the alpha, the better.

Due to the fact that yields are either moving towards the top of the range or towards the bottom of the range, Pimco is likely toConsider increasing duration or reducing holdings.But Clarida doesn't think that's really the focus of widespread attention.

Fed mission accomplished?

Clarida pointed out that, in fact, the Federal Reserve has been hurt several times in the past few years, including during his tenure, when it looked at improving inflation data and inferred this. So,Clarida thinks the committee will certainly be cautious about declaring "mission accomplished" or a victory against inflation, but there is no doubt that they are pleased with last week's data.

The future of the dollar?

Clarida believes that the once very hawkish Federal Reserve and the collapse of the market during the COVID-19 pandemic led people to turn to quality assets, but now that the pandemic-induced market collapse is over, the Federal Reserve's goal of raising interest rates and slowing inflation may be about to be achieved. However, all three factors areNot necessarily pointing to dollar weakness, but to dollar depreciation, which means reversion is not surprising.

The Bank of Japan's policy outlook?

Kazuo Ueda, governor of the Bank of Japan, stressed the continuity of monetary policy. In some of his speeches, he stressed that while inflation is currently above the 2 per cent target, their own analysis puts the underlying inflation rate at just under 2 per cent.Clarida favors a slightly dovish stance by the Bank of Japan, leaving current policy unchanged.