The chance that the Federal Reserve will boost interest rates this year to limit inflation is higher than the near-zero level currently priced into the markets, said Jon Brager, a portfolio manager at Palmer Square Capital Management, a Kansas City-based firm that invests in floating rate corporate debt.
The firm’s “base case scenario isn’t that the Fed is going to hike,” but there are signs that central bank officials are starting to consider becoming more restrictive to deal with inflationary pressures, some driven by President Trump’s policy priorities, Brager told Quartz.
Fed policymakers voted last month to hold rates steady, the first time since September they didn’t cut. While many investors still expect at least one more reduction in 2025, minutes from the last meeting showed that officials want more progress on inflation first. CPI picked up in January.
The U.S. has a structural deficit of about 6% of GDP tied to fixed items like social security, which will be unaffected by DOGE’s assault on discretionary spending, according to Brager. This is stimulative and inflationary, as is immigration action, which may create labor shortages in some industries.
The inflationary boost from Trump’s proposed tariffs may be a one-off, but the country’s overall protectionist turn — including under Joe Biden — creates longer-term pressures, he added. Trump has also shown a desire to run the economy hot to boost nominal growth and is willing to tolerate inflation higher than the Feds target to achieve this, Brager said.
Finally, the Magnificent 7 alone will invest $300 billion plus this year on AI, creating a multiplier effect of about $1 trillion, instead of buying back stock or returning cash to shareholders. When spending from the rest of the tech sector is added, that creates significant private-sector stimulus.
So while the chance of a hike remains low, the possibility matters because “the bond market is obsessive over Fed policy, and reacts violently to changes in Fed positioning,” Brager said. This has created a lot of volatility in fixed-income funds, which doesn’t affect the floating-rate debt in Palmer Square’s products.
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