(Bloomberg) — Australia’s QIC Ltd. expects the Federal Reserve to keep interest rates elevated through the year — or even raise them further — as the US economy powers ahead, a contrarian call that’s increasingly gaining traction.
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After dialing back duration in its debt portfolio to neutral in the midst of a frenetic bond rally late last year, Brett Solomons, a senior portfolio manager at the A$106 billion ($70.2 billion) fund, is opting to keep his powder dry to stay nimble amid the various economic scenarios that may unfold. The Fed can’t declare mission accomplished on inflation just yet given the continued strength of the US labor market, he said in an interview earlier this week.
“If the labor market remains firm, nominal wage growth remains elevated and inflation remains above target, it will challenge the Fed’s ability to cut rates,” said Solomons, who’s part of QIC’s Liquid Markets Group, which oversees $15.8 billion in cash and fixed income assets. “That’s now a potential pathway we need to consider.”
His warning runs counter to the jubilation across global markets that the era of restrictive US monetary policy is in the rear-view mirror. Powell bolstered that sentiment Thursday when he said the Fed was “not far” from the confidence needed to cut rates. Even with a slight pullback in market expectations this year, swaps indicate investors are betting on at least three quarter-point cuts by the Fed in 2024.
QIC is backed by the Queensland government and manages money from the state and other public and private clients.
Read more: Australia’s Pension Funds Aren’t Joining Rate-Cut Party Just Yet
Solomons is among a small but growing band of investors that see such bets as misplaced. Torsten Slok from Apollo Management said a re-accelerating US economy means rates are unlikely to fall in 2024. The debate over the Fed’s path centers around the perceived strength of the US economy, with market wagers shifting at every data release.
In one of the most recent indicators, the Fed’s preferred gauge of underlying inflation rose in January at the fastest pace since early 2023, matching estimates. US employment data due later Friday will prove crucial in solidifying — or weakening — the market’s consensus for a dovish pivot. Bloomberg Economics expects a solid print that shows strength in hiring concentrated in just a few industries.
Traders have largely chosen to ignore signs of resilient price pressure, driving a rally in 10-year Treasuries from a recent trough in October. The yield has fallen from around 5% in mid-October to under 4.1%. US stocks have also surged to record levels, powered by the tech sector, which is typically sensitive to interest-rate expectations.
“It will be harder for the Fed to do these non-recessionary rate cuts if inflation is proving to be stickier or even turning up slightly,” said Solomons. “That’s what we’re looking for.”
–With assistance from Vince Golle.
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