Bridgewater’s Bob Prince says Fed rate-cutting hopes are ‘off track’

Persistent inflation and hot US growth have left the Federal Reserve’s rate-cutting hopes “off track”, Bridgewater’s Bob Prince said on Tuesday, adding an influential voice to the growing chorus asking whether US rates will start to fall this year.

“So far, this year is not transpiring the way that the Fed — or interest rate markets — have described. I think it is clear the Fed is off-track now. The question is how far off track,” Prince, the $112.5bn hedge fund’s co-chief investment officer, told the Financial Times.

His comments came as Atlanta Fed president Raphael Bostic told Yahoo News that if progress on inflation stalls and economic growth remains strong, it is possible the US central bank may not cut interest rates at all this year. Bostic is a voting member of the Federal Open Market Committee.

Investing giant Vanguard last month said it no longer expected the Fed to cut interest rates this year, while JPMorgan Chase’s chief executive Jamie Dimon, in his annual shareholder letter this week, said government stimulus could mean rates and inflation could stay higher than markets were expecting.

Traders in the futures market have decreased their expectations of how many rate cuts the Fed will make this year, from six or seven in January to between two and three as inflation data has come in hotter than expected.

The Bureau of Labor Statistics will on Wednesday release consumer price inflation data for March, which could further sway investor expectations. Economists polled by Bloomberg forecast a tick-up in the headline rate to 3.4 per cent, with the core rate dipping to 3.7 per cent.

After raising interest rates to the highest level in 23 years, the Fed indicated at the end of last year that it was done. In their December dot plot — a survey of officials’ expectations for inflation, growth and interest rates — Fed members indicated they saw growth and inflation slowing, and accordingly expected three quarter-point cuts to rates this year.

Despite stronger than expected inflation figures since then, the Fed’s March dot plot reaffirmed its expectations of three cuts, even as officials raised their outlook for inflation and growth this year.

“The Summary of Economic Projections is an if/then statement. If inflation and growth are at certain levels, then interest rates can be lowered. None of the ifs are true right now,” said Prince.

For this reason, Prince said he saw “no reason to move out of cash into longer-term bonds at the moment”.

Rates on Treasury bills were far higher than those on longer-term Treasuries, he noted, and investors were not being paid much to take on the additional risk of holding longer-dated bonds. Investors betting that interest rates were not coming down anytime soon would have no reason to move out of cash, he said, “because there’s not an appropriate risk premium yet in assets relative to cash”.

The only reason to cut rates at current levels of growth and inflation would be if there was a big boost to productivity in the economy — either from a surge in immigration or another big addition to labour force participation — that would allow the US to have non-inflationary growth, said Prince.