A soft landing is a “very probable scenario,” according to PGIM Fixed Income Senior Portfolio Manager Michael Collins. He told Bloomberg TV on Friday that GDP growth slowing to 0%-2% would be a good outcome and would leave rates closer to 4%. Meanwhile, investors are now expecting the Fed to raise interest rates to 5.25% by mid-2023, following the stronger-than-expected Friday jobs report. Loading Something is loading.
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The Federal Reserve sticking a soft landing is a “very probable scenario,” and benchmark rates don’t need to go much higher, according to PGIM Fixed Income Senior Portfolio Manager Michael Collins.
Earnings and demand will come down, but the service sector remains robust with the travel and restaurant industries seeing a surge of customers, he told Bloomberg TV on Friday.
“There’s definitely some credence to the idea of a moderation in growth,” he said. “Maybe we get 0-2% GDP [growth] for the next year or two. I think that’s a really good outcome.”
That would bring inflation down to the 3% range and leave the fed funds rate near 4%, and not 5%, he added. The most recent consumer price index reading put inflation at just above 8%, while the Federal Reserve on Wednesday already lifted the top end of the benchmark rate to 4%.
Meanwhile, investors are now expecting the Fed to raise interest rates to 5.25% by mid-2023, following the stronger-than-expected Friday jobs data, which showed payrolls expanded by 261,000 last month.
But Collins sees a terminal rate at 5.25% as too high: “I think 5 and a quarter is going to be a big overshoot in retrospect, and the funds rate ultimately will land somewhere lower than that.”
He added that a scenario where the US experiences a “short and shallow recession” would assume corporate earnings would grow slower or even be flat but wouldn’t turn negative, while the unemployment rate peaks at about 4.5% instead of surging to 6.5%-7%.
“Those are the two scenarios we’re dealing with. And unfortunately the probability of each of those two scenarios — the soft landing and the harder landing — are I don’t know maybe it’s 50/50,” he said. “I actually think the soft landing is a very probable scenario. But in either scenario, you end up with a lower interest rate structure than you’re dealing with right now.”