Leslie Norton: The Fed cited stubbornly high inflation as it raised interest rates<\/a> this month. What are your inflation assumptions?<\/p>\n Rick Rieder: We think core inflation is peaking and coming down. We think core PCE [in July, the core Personal Consumption Expenditures Price Index<\/a> was up 3.3%<\/a> from a year earlier] inflation will come down to the mid-twos within the next few months. The problem with headline PCE is that the war is keeping energy prices elevated. We have some optimism that inflation will come down over the next few months. We\u2019re going through a productivity revolution. Productivity is exploding higher in terms of how companies use logistics, inventory management, and customer procurement. I\u2019m quite convinced inflation is peaking and will be coming lower over the next couple of years. Timing is tricky, but it will allow the Fed to stop hiking and ultimately start cutting rates in the next year or so.<\/p>\n Norton: What\u2019s keeping inflation high?<\/p>\n Rieder: The major sectors of the economy that have kept inflation high have been healthcare, education, insurance, and shelter. They\u2019re not interest rate-sensitive, and generally not as economically cyclical, but inflation here has been sticky. Ironically, shelter inflation is high because we can\u2019t build any houses. We can\u2019t build any houses because the mortgage rate is too high. Given the cost of the mortgage, home prices would have to come down 35% to make it equivalent to where rent is today. That\u2019s part of why I think raising rates won\u2019t help. Healthcare in an aging demographic, insurance, tuition costs\u2014they\u2019re all very, very hard. That doesn\u2019t mean the Fed should give up. But if you thought about how much you\u2019d have to move interest rates higher to actually bring these prices meaningfully lower, you\u2019d have to really send the economy into a recession. That puts pressure on most of the country\u2014small businesses, low-income, everybody who wants to buy a house, young people. Truth is, the only people who borrow off the overnight funds rate are floating-rate borrowers\u2014that is, credit card, auto loan, mortgage\u2014and those are already in recession.<\/p>\n What to Expect From the Fed<\/p>\n Norton: What else should we expect from the Fed?<\/p>\n Rieder: Given the dot plot, the chairman\u2019s comments, and the fact that it will take a bit more time to get core PCE closer to the 2.0% target, you have to bank on another hike this year. Could you get one more next year? It\u2019s possible. My sense is the economy will decelerate, and inflation will come down, particularly if we get to the other side of the war.<\/p>\n<\/p>\n Is Treasury\u2019s Buyback Plan Working?<\/p>\n Norton: The US Treasury surprised the market last month by announcing it would step up purchases of long-term bonds to curb rising yields. Is the Treasury Department\u2019s buyback plan working?<\/p>\n Rieder: It\u2019s hard to prove one way or another. It puts in the back of people\u2019s minds that the US Treasury has tools to combat significantly higher rates. There hasn\u2019t been a disruptive, untethered movement in the back end of the curve. Secretary [Scott] Bessent hasn\u2019t spent any real money [so far].<\/p>\n Norton: What grade would you give Secretary Bessent?<\/p>\n Rieder: I think Bessent is doing a very solid job, but I don\u2019t want to give a letter grade. He gets a passing grade, which is a better grade than many would give him. The US has $40 trillion in debt. We have a compounding interest problem. When you raise rates, you increase the compounding effect. He could certainly buy back more. We have gold on the balance sheet. The tricky thing is that 89% of US debt is two years and shorter. Buying back debt on the long end by definition shortens the weighted average maturity of your debt, while you ultimately want to try and extend the average maturity to create a more stable term structure of the country\u2019s debt. Are we just lifting our interest costs significantly as a country? The secretary is trying to mitigate some of that damage.<\/p>\n Norton: How much further could US long-term yields rise?<\/p>\n Rieder: You could see another 25-40 basis points more. But because of the aging of the population, it becomes extremely compelling for an endowment or pension or foundation to put money to work at these real rates. It\u2019s generational that you get to do this. I run an exchange-traded fund called iShares Flexible Income Active ETF BINC<\/a>. It has a 7.2% yield, a duration under three years, and an A- rating. I waited four decades for that. It\u2019s pretty darn compelling.<\/p>\n
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