(Bloomberg) -- Wall Street's expectations that the Federal Reserve will cut interest rates as early as March are premature, according to DoubleLine Capital's Jeffrey Sherman.
“At this stage, we see core inflation has been dampening, the trajectory is right, but the market is definitely extrapolating this into that the Fed is going to normalize policy back to a much lower rate,” the deputy chief investment officer said on Bloomberg TV Thursday. “It just seems it's a little optimistic today to think that's going to happen so soon, as early as March.”
US Treasury yields rose across the curve Thursday as traders dialed back bets for a March rate cut, with the labor market staying resilient and minutes from the Fed's December meeting suggesting rates could remain at restrictive levels for a while. The chances of a rate cut in March, which is the earliest traders expect the easing cycle to start, dropped to about 64%, compared with 70% a day earlier.
The US economy isn't out of the woods yet when it comes to a recession, particularly if the inflation rate re-ignites or if the Fed continues to keep interest rates higher for longer, Sherman said. He noted the Treasury yield curve is still inverted, which often precedes a recession.
“As you look into this year, the risks are still there for that recession, and ultimately I think it's really going to come down to, essentially, how the labor market unfolds,” he said.
Sherman also pointed to what he called a “grabby” credit market, one where investors are chasing yields in corners that haven't had much supply and taking advantage of an uptick in overall issuance by corporate borrowers.
“That's where we teach patience and persistence,” he said. “You don't go chase those ‘grabby' type of areas, and you make sure you have the positioning coming into it.”
--With assistance from Romaine Bostick.
(Updates with additional comments throughout.)
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