Yahoo Finance DoubleLine’s Jeffrey Sherman cautions Fed shouldn't push rates above 6%
"The problem is that for all the hikes that we have in the marketplace, they're not really in the economy yet,” Sherman told Yahoo Finance in a sit-down interview.
The Federal Reserve is likely to take its federal funds rate beyond 5% but must assess the impact of these hikes before pressing higher, according to DoubleLine Capital’s deputy chief investment officer Jeffrey Sherman.
"These long and variable lags — we never know what they look like — and I'm afraid that they could be a little bit longer here, and so the Fed should be cautious," Sherman told Yahoo Finance during a sit-down interview Wednesday in Tampa, Florida.
Programming note: Doubleline CEO Jerffey Gundlach's interview with Yahoo Finacne will air in Yahoo Finance Live's 3 p.m. ET hour on Wednesday. Check it out on YouTube or finance.yahoo.com.
"They shouldn't just push [interest rates] to 6%, 7%," Sherman added, citing a suggestion made by St. Louis Fed President James Bullard several months ago the Fed may need to take rates to a level between 5% and 7%. "I think what they need to do is be patient, but the one thing the Fed doesn't want to do is stop hiking and have to restart hiking."
“Ultimately we have a printing press, right?” @DLineCap Deputy CIO Jeffrey Sherman says on the U.S. debt ceiling. “We can satisfy our debts if we choose to — if we don’t choose to, it’s a whole other issue. Then you jeopardize the overall economy as a whole, for what?” pic.twitter.com/YFA7Ir2JMr
— Yahoo Finance (@YahooFinance) February 22, 2023
According to Sherman, rising interest rates have yet to fully permeate the U.S. economy and their lagging effects are expected to materialize in the second half of the year.
Since March 2022, the Fed has raised the target range for its benchmark interest rate by a cumulative 4.5%. Markets expect at least another 0.50% worth of rate hikes in the coming months. Policymakers have been adamant more hikes will be needed to squash inflation down to its long-term target of 2%.
"The problem is that for all the hikes that we have in the marketplace, they're not really in the economy yet," he said, forecasting a more challenging environment in the later part of 2023 and a potential recession next year.
"We're used to the Fed inducing a recession and they will likely induce one again, but it's the timing that's really [unknown]," Sherman said. "But for right now, the economy still looks okay."
Earlier this year, market participants had speculated the Fed may pause or pivot this year but strong economic data in January and recent pickups in inflation readings have prompted investors to recalibrate their expectations for how high interest rates will go.
Last month, nonfarm payrolls rose by a whopping 517,000 last month while retail sales surged 3%.
The Consumer Price Index (CPI), meanwhile showed inflation accelerated in January, while cooling only slightly over the year to 6.4%. Meanwhile, producer prices shot up by the largest amount in seven months.
"The market's been fighting the Fed," Sherman told Yahoo Finance. "The Fed has said they're going to be staunch this year," he said, adding it took January’s strong jobs report and retail sales number for investor optimism around a pause to be reined in.
Based on federal funds futures, the central bank is seen raising its policy rate to 5.5% by July, while the highest share of investors are betting the year will end with rates around a 5%-5.25% level.
Just weeks ago, investors had expected to close 2023 out with rates around 4.5%-4.75%, the same level as today.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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