Wall Street’s anticipation of an early Federal Reserve rate cut in March is premature, according to Jeffrey Sherman, Deputy Chief Investment Officer at DoubleLine Capital. Speaking on Bloomberg TV, Sherman expressed skepticism about the market’s optimism, stating, “At this stage, we see core inflation has been dampening, the trajectory is right, but the market is definitely extrapolating this into that the Fed is going to normalize policy back to a much lower rate. It just seems it’s a little optimistic today to think that’s going to happen so soon, as early as March.”
US Treasury yields increased across the curve as traders scaled back expectations for a March rate cut. The resilience of the labor market and minutes from the Fed’s December meeting, indicating the possibility of rates remaining at restrictive levels, contributed to this shift. The likelihood of a rate cut in March dropped to about 64%, down from 70% the previous day.
Sherman cautioned that the US economy might not be out of the woods regarding a recession, especially if inflation reignites or if the Fed maintains higher interest rates for an extended period. He highlighted the inverted Treasury yield curve, a potential precursor to a recession, and emphasized that the risks of a recession still linger, with the labor market playing a crucial role in determining the outcome.
Additionally, Sherman drew attention to what he termed a “grabby” credit market, where investors pursue yields in areas with limited supply, taking advantage of increased overall issuance by corporate borrowers. He advised patience and persistence, warning against chasing opportunities in these “grabby” areas and emphasizing the importance of strategic positioning.
