Pimco Credit CIO says the Fed is behind the anti-inflation curve – News Couple

Pimco Credit CIO says the Fed is behind the anti-inflation curve

(Bloomberg) — How the Federal Reserve responds to faster inflation is the biggest risk to corporate credit over the next year, according to one of the world’s largest bond investors.

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Pacific Investment Management Inc. is weighing up travel and leisure bonds — a bet on a post-pandemic awakening — as well as bank debt as it bets on a strong economy bouncing back from Covid, Mark Kessel, the company’s chief investment officer for global credit, said Thursday during a Bloomberg Intelligence event.

But Kessel said a hot economy and continued wage growth may continue to fuel inflation. The investor spoke days after Federal Reserve Chairman Jerome Powell focused on inflation, saying its acceleration no longer seemed “temporary,” meaning the central bank could end its asset purchase program early.

“We were very concerned that the Fed was frankly behind the curve and needed to move more quickly,” Kessel said. He added that the upbeat turnaround this week is welcome and markets should be able to deal with moderately higher rates.

“I don’t think it will be a very big event for the markets,” he said. “I think the stock market, the housing market and consumers can handle it.”

A tight labor market and rapidly increasing wages allow consumers to incur higher costs and enable companies to raise prices, Kessel said. Its credit downside scenario is if the labor market remains tight for an extended period.

Suppose labor force participation does not improve. Then, Kessel said, “We could have a bigger problem.” Then, instead of the Fed capitalizing on the breaks, we might see them cash in on the breaks. This would cause a lot of fluctuations. This is the greatest danger.”

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