Fed Is in ‘Intractable Situation,’ Hoping for the Best on GrowthBy and
PGIM’s Peters says low inflation starting to confound Fed
Central bank’s strategy ‘goes against’ historical approach
The Federal Reserve’s focus on raising interest rates risks limiting economic growth at a time when inflation trails the central bank’s target, said Greg Peters, who helps oversee more than $650 billion at PGIM Fixed Income.
“They are somewhat in an intractable situation here,” Peters, who is senior investment officer at the fixed-income unit of Prudential Financial Inc.’s $1 trillion asset manager, said Wednesday on Bloomberg Television. “I think with growth, they’re just kind of hoping for the best.”
Federal Reserve Chair Janet Yellen has sought to assure markets that policy makers are aware of the risks if inflation is too low, while expressing confidence that a strong labor market will rejuvenate price pressures. Inflation has been under the Fed’s 2 percent target for almost every month since April 2012, raising worries in some quarters that the U.S. central bank is headed for a mistake if it doesn’t rebound and officials continue to tighten monetary policy.
“This is something that’s really starting to confound the Fed,” Peters said. “If there’s one data release that’s going to limit their ability to do what they want to do, which is raise rates and reduce the balance sheet, it’s the inflation piece.”
Other central bank officials have raised concerns about growth. St. Louis Fed President James Bullard has said that growth in the U.S. is stuck in a 2 percent range. The domestic economy’s growth in the first quarter was just 1.4 percent, according to Commerce Department figures last week.
Still, the unemployment rate dropped to 4.3 percent in May, a 16-year low. And central bankers are working to unwind the extraordinary measures taken to counter the financial crisis, such as low interest rates and a Fed balance sheet that climbed to more than $4 trillion.
“Their policy goes against anything that they’ve done before,” Peters said.
— With assistance by Jeanna Smialek