The Federal Reserve’s predicted interest rate peak between 5.5% and 5.75% has left many asset managers uncertain about their rate forecasts for the second half of the year. However, Franck Dixmier, the global CIO at Allianz Global Investors, is undeterred by this ambiguity, stating, «Monetary policy is really starting to bite now.»
Dixmier holds a different view, predicting that the US interest rate will peak between 5.25% and 5.5%. Following this, he anticipates a four to six-month pause by the Federal Reserve, after which the rate will decline. Allianz Global Investors remains steadfast in its investment strategy, focusing on the belly of the yield curve, particularly US Treasury bonds with maturities of seven to ten years. Dixmier explains, «Whenever there is any hint of weakness in the market, we buy.»
The recent decision by the Federal Reserve to maintain the benchmark interest rate within the current range of 5% to 5.25% did not come as a surprise to Dixmier or the market. The central bank had already indicated a pause in interest rate hikes while awaiting further economic data.
However, the decision, referred to by Vincent Reinhart, former economist at the Federal Reserve, as a «policy mistake wrapped in a communication error,» has made it challenging for investors to make meaningful predictions about interest rates, let alone with conviction.
Fed seems unwilling to adapt
Reinhart argues that the central bank has failed to adhere to its oft-repeated commitment to being data-dependent. «The expectation-setting for a pause about five weeks ago made the Fed unwilling to adapt to changing circumstances.»
Many asset managers had already prepared for such uncertainties in the future trajectory of interest rates and their impact on the market. Hence, their semi-annual outlooks are filled with hesitations about the Fed’s policies.
State Street Global Advisors notes in its outlook that «the range of potential market outcomes has never been wider.» The US asset manager maintains neutral positions in its portfolios and advocates for diversification.
Schwab analysts caution that the market is «not yet safe» and may experience bouts of weakness due to ongoing uncertainty over Fed policies, the risk of a recession, lower corporate earnings, and heightened investor sentiment.
Dixmier and his team approach the race with more conviction. According to him, monetary policy is genuinely starting to affect the United States.
Cooldown seen as positive
To support his point, Dixmier mentions the cooled-down US services sector, which he describes as a «consistent positive surprise» in the economy. The services sector is at the forefront of the battle against inflation, as services prices are less sensitive to interest rate hikes.
According to the Institute for Supply Management (ISM), the main gauge of prices paid by service providers for goods or materials used in the production process of services reached its lowest level in three years in May.
«The manufacturing sector is already in a recession,» Dixmier adds. «Manufacturing activity is weak, as evidenced by survey data, indicating that the sector is currently in a prolonged downturn. The US labor market is also cooling off. Last week, it was revealed that unemployment claims had risen to their highest level since October 2021.»
This article originally appeared in Dutch on InvestmentOfficer.nl.