Key to assessing the path of interest rates is understanding when enough is enough, says bond giant Pimco.
Casualties from monetary policy tightening are inevitable because higher interest rates are intended to target the real economy, says fixed income giant Pimco.
He thinks central banks are close to ending their tightening cycle, singling out the Bank of Canada, the Reserve Bank of New Zealand, the US Federal Reserve, and the Reserve Bank of Australia.With benchmark rates in restrictive territory – meaning there is less cash available in the economy – “it’s now a matter of balancing between breaking too many things versus not breaking anything”, the fund manager says.
The worst-case scenario, Mead argues, is when policymakers cut rates too early and fail to rein in inflation because they have to start tightening again. This is particularly useful when $400 billion worth of fixed-rate mortgages roll off to variable rates this year in the so-called “mortgage cliff” when borrowers see their interest rates jump from 2 per cent to close to 6 per cent.
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