• Manager of $250 billion says unemployment rate can fall more
  • Fed may let inflation run as high as 3% compared with 2% goal

There’s still a lot of room to grow in the U.S. job market without running short of workers or fueling wage inflation, according to Scott Minerd, who manages $250 billion for Guggenheim Partners.

“Full employment’s a lot lower than people think,” Minerd, Guggenheim’s global chief investment officer, said during a Monday telephone interview from Los Angeles. “It’s probably below 4 percent.”

Scott Minerd
Scott Minerd
Photographer: Chris Goodney/Bloomberg

The Federal Reserve has targeted an unemployment rate of 4.6 percent to 5 percent and an inflation rate of 2 percent to guide interest rate policy. U.S. employers added 151,000 jobs in August, fewer than expected, the Labor Department reported Friday. That prompted concerns about reaching full employment, one of the conditions to justify what would be the first rate hike since December.

Minerd said he expects the Fed to raise rates only once this year, in December, and anticipates that rates will remain low into the next decade. Downward pressure is coming from abroad, he said, with central banks in Europe and Japan offering negative interest rates on their debt.

His bullish outlook contrasts with money managers including Bill Gross of Janus Capital Group Inc., who called for rate hikes to promote sustainable growth and compensate insurers, banks and individual savers. Gross said last week he expects a Fed hike this month followed by a second increase as soon as six months later.

One Rate Increase

“I’m not saying we can’t get rates up to 2 percent at some point,” Minerd said. “But the idea we’re going to get to 3 percent or 4 percent, I think that’s extremely remote over the next five years or so.”

The probability of a hike at this month’s Fed meeting is 34 percent, according to data compiled by Bloomberg. It rises to 39.7 percent at the November meeting and 61 percent in December.

August’s unemployment rate remained at 4.9 percent for the third consecutive month. The labor force participation rate stood at 62.8 percent compared with a 20-year average 65.5 percent. The U.S. consumer price index, not seasonally adjusted, rose 1.35 percent in the last 12 months, through July.

“I think the Fed will ultimately tolerate a higher rate of inflation than the 2 percent target,” said Minerd, who serves on an investor advisory committee for the Federal Reserve Bank of New York. “I think they’d be willing to see inflation move up to 3 percent.”

‘Barbell’ Strategy

In anticipation of continued low rates, Minerd has pursued what he calls a “barbell” strategy, investing in short-term floating-rate securities and long-duration high-quality debt, such as zero coupon bonds.

His $3.8 billion Guggenheim Total Return Bond Fund has gained 7.1 percent this year, outperforming 85 percent of its intermediate-term bond peers, according to data compiled by Bloomberg. His $3.3 billion Macro Opportunities Fund is up 7 percent, outperforming 88 percent of peers in the alternative fixed-income category by placing large bets in unrated and below-investment-grade debt, according to data compiled by Bloomberg.

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