Higher interest rates are a likely prospect this year due to the risk of an inflationary rebound, according to Rob Arnott.
Arnott, a renowned investor, predicts that inflation will be between 3.5%-5% by year-end, as he mentioned on Bloomberg TV. He noted that higher inflation rates would decrease the likelihood of a rate-cutting cycle.
"Four to five percent inflation will be seen as a significant setback, preventing the Fed from cutting rates and potentially prompting another hike," said Arnott, founder of Research Affiliates.
Markets are closely tracking monthly inflation data, with investors hoping for a decline that could lead to a Fed policy shift. However, the central bank has postponed rate cuts, waiting for clear signs of disinflation in the data.
Although May's consumer price index report showed cooler-than-expected inflation, Arnott cautioned that achieving a continued decline might be challenging for the rest of the year.
This is because the inflation measure incorporates last year's readings, and inflation was particularly low in the latter part of 2023:
"If inflation was abnormally low during the last few months of last year, there's a greater likelihood of upward pressure on inflation now," he explained.
The Fed has indicated it expects only one 25-basis point rate cut this year, which is less than the two to three cuts anticipated by the market. The central bank has faced criticism for its data-dependent decision-making approach.
If inflation continues to ease, the economy might be weakening enough to justify a loosening of monetary policy. However, Arnott is skeptical about the impact of a single rate cut on the economy.
"It's not clear to me that a single rate cut would do much other than boost market enthusiasm," he said, referencing the bull run fueled by the anticipation of lower interest rates.
He added, "I think the Fed is stimulating bubbles rather than the economy."
