The Federal Reserve is likely to take its federal funds rate beyond 5% but must assess the impact of these hikes before pressing higher, according to DoubleLine Capital’s deputy chief investment officer Jeffrey Sherman.
"These long and variable lags — we never know what they look like — and I'm afraid that they could be a little bit longer here, and so the Fed should be cautious," Sherman told Yahoo Finance during a sit-down interview Wednesday in Tampa, Florida.
Programming note: Doubleline CEO Jerffey Gundlach's interview with Yahoo Finacne will air in Yahoo Finance Live's 3 p.m. ET hour on Wednesday. Check it out on YouTube or finance.yahoo.com.
"They shouldn't just push [interest rates] to 6%, 7%," Sherman added, citing a suggestion made by St. Louis Fed President James Bullard several months ago the Fed may need to take rates to a level between 5% and 7%. "I think what they need to do is be patient, but the one thing the Fed doesn't want to do is stop hiking and have to restart hiking."
According to Sherman, rising interest rates have yet to fully permeate the U.S. economy and their lagging effects are expected to materialize in the second half of the year.
Since March 2022, the Fed has raised the target range for its benchmark interest rate by a cumulative 4.5%. Markets expect at least another 0.50% worth of rate hikes in the coming months. Policymakers have been adamant more hikes will be needed to squash inflation down to its long-term target of 2%.
"The problem is that for all the hikes that we have in the marketplace, they're not really in the economy yet," he said, forecasting a more challenging environment in the later part of 2023 and a potential recession next year.
"We're used to the Fed inducing a recession and they will likely induce one again, but it's the timing that's really [unknown]," Sherman said. "But for right now, the economy still looks okay."