According to Jeffrey Sherman, Deputy CIO at DoubleLine Capital, the Federal Reserve should pause its cycle of rate hikes, rather than delivering the last hike as expected next week. Sherman argues that the tightening that the Fed initiated last year is having the desired impact, but also suggests that the recent failures of Silicon Valley Bank and two other US lenders indicate that the Fed has gone too far.
“I think they should pause,” Sherman said on Bloomberg Television. “The old saying is that the Fed hikes until they break something. I think it’s obvious that something broke here.”
Despite Sherman’s concerns, it is still more likely than not that Fed Chair Jerome Powell will deliver another 25 basis-point hike next Wednesday, in line with bond traders pricing a quarter-point hike. Banks such as Goldman Sachs and Barclays have even scrapped their calls for an increase altogether.
Sherman believes that the Fed wants to remain committed to fighting inflation and that the upcoming hike is an opportunity for Powell to deliver one final move. “This is a chance for Jay to get one last hike in. I think they will deliver that hike on Wednesday absent some massive development to the downside,” he said.
The Treasury market has been the epicenter of market volatility over the past week, with the two-year Treasury yield plunging more than 70 basis points lower to break below 4%, after piercing above 5% last week for the first time since 2007. Before the banking turmoil shook the financial world, Powell gave a hawkish warning before the Senate Banking Committee, underscoring the Fed’s commitment to fighting inflation. This prompted bets in the swaps market to lean toward a half-point hike at their March meeting.
Sherman’s views are consistent with those of DoubleLine Capital’s Jeffrey Gundlach, who also expects next week’s rate hike to be the last for the year. Gundlach recently told CNBC that anything higher than a 25 basis-point rise could damage the central bank’s credibility.
In summary, Sherman and Gundlach’s views suggest that the Fed should pause its cycle of rate hikes, given recent events in the banking sector, and that a hike next week should be limited to 25 basis points. Despite this, the likelihood is still that Powell will deliver the final hike of the cycle as planned.
1 Adapted from source: Greifeld, Katherine and Isabelle Lee. "DoubleLine’s Sherman Says Fed Should Not Hike Rates Next Week." Bloomberg, 17 Mar. 2023, www.bloomberg.com/news/articles/2023-03-17/doubleline-s-sherman-says-fed-should-not-hike-rates-next-week