The world’s largest and most influential bond manager has called on the Federal Reserve to cut interest rates more aggressively than it is expected to, warning that recent data points are underestimating the extent of the American economy’s slowdown.
Pimco, which manages $1.8tn in assets, believes the Fed will need to take decisive action to stave off a recession, as the economic outlook darkens and the trade conflict with China shows few signs of a resolution.
“We aren’t so sure that the US economy is ‘in a good place’ and view recession risks as sufficiently worrisome to warrant further Fed easing,” Pimco’s US economist Tiffany Wilding wrote in a recent blog post.
Traders are currently pricing a more than 99 per cent chance that the Fed will cut its benchmark rate by 25 basis points at its policy meeting in September, with the odds of an aggressive 50bp cut essentially nil.
Ms Wilding said a 25bp cut may not be enough, arguing that labour market momentum is slowing, there are few signs of a resolution to the trade war and the risk of lower rates contributing to financial market excess is low.
“We think a more aggressive approach will be needed to mitigate the risk of recession in the US. We believe so, in part, because recent economic data may understate the extent to which the economy is slowing,” she said.
The unemployment rate in the US remains at a multi-decade low of 3.7 per cent, but is no longer falling as consistently as previously.
“We can’t emphasise enough that labour market momentum has decelerated more markedly than most forecasters were previously expecting,” Ms Wilding wrote.
Still, the economy is growing at a healthy clip. Data released on Thursday showed gross domestic product expanded at an annualised rate of 2 per cent in the second quarter, down slightly from a previous estimate of 2.1 per cent.
The central bank is under an unusual level of scrutiny ahead of its September policy meeting, as it tries to navigate a path between ambiguous domestic economic data and the still uncertain effects of the trade conflict with China. Meanwhile President Trump has been firing a near-daily barrage of tweets urging the central bank to ease monetary policy aggressively.
“The Economy is doing GREAT, with tremendous upside potential! If the Fed would do what they should, we are a Rocket upward!” the president tweeted on Thursday.
In a closely watched speech in Jackson Hole, Wyoming, last week, Fed chairman Jay Powell gave few new hints on the outlook for interest rates.
Pimco expects further easing later this year after September’s expected quarter point cut.
“We expect next month’s 25 basis point rate cut will be followed by more rate cuts by the end of the year. Ultimately we think FOMC participants will provide the support, but recently have become more worried that the support won’t come soon enough.”