The Federal Reserve’s concerns about inflation, and its push to raise rates, are somewhat surprising, according to a leading bond manager.
With the unemployment rate at 4.3 percent—the lowest rate since 1999—and evidence of recent wage growth, the Fed is engaging in some “preventative medicine,” said Philip Barach, president and co-founder of DoubleLine Capital, on a conference call Tuesday. “Plus it gives them the flexibility to [lower] rates later on if something happens.”
“We don’t share that concern about inflation,” Barach said. “But it doesn’t matter what we think.”
Developments in technologies like robotics and driverless cars will reduce pressure on wages, he said. And although home prices continue to rise, rental rates seem to have stabilized.
The other big contributor to inflation, energy prices, could be in a long-term decline.
“Our view is that oil will go lower,” Barach said. The cost of fracking is dropping, and more supplies are being found. “And at the same time you have huge alternatives” coming online from renewable sources. “Ultimately, oil will be in a bear market … for the foreseeable future.”
Barach thinks 10-year Treasury rates could bump up in September as the Fed starts to reduce its balance sheet, but will end the year at around 2.5 percent or lower despite current forecasts of around 2.7 percent.
In terms of the economy, “there’s very low probability of recession right now,” he said, based on a recent rise in leading economic indicators.