- Fidelity's global macro chief said bond markets are not in a panic over inflation.
- "The bond market seems to be somewhat chill about long-term inflation effects," Timmer said to Yahoo Finance.
- However, he said he expects the Fed to keep hiking rates to lower sky-high prices.
The bond market is showing signs that red-hot inflation will begin to cool down and a recession isn't as immediate as it seems, Fidelity's director of global macro, Jurrien Timmer, said in an interview on Wednesday.
Timmer, who has served as Fidelity's global asset expert for over 20 years, said rates were either declining or staying steady in the Treasury Inflation-Protected Securities market, bringing some optimism to inflation expectations.
The Fidelity executive pointed to the 5-year, 5-year-forward rate — a predictor of five-year inflation, five years from now — which has held steady at roughly 2% for most of the past year, as a sign that price expectations are beginning to stabilize.
"The bond market seems to be somewhat chill about long-term inflation effects," Timmer said in an interview with Yahoo Finance.
He added that, although the treasury yield curve is beginning to flatten, it hasn't completely inverted, which is typically seen as a precursor to a recession. "I don't think a recession is imminent at all," Timmer said.
But it doesn't mean the economy is in the clear. Inflation rang in at a record 8.6% in May, the largest jump in prices since 1981. Supply-chain issues are also ongoing, and Timmer remains concerned that all of that could impact people's expectations of prices, which could result in chronic inflation.
He said he expects the Fed to hike interest rates in order to tighten economic conditions, likely raising them above 3% in order to lower inflation. Even then, though, it's unlikely the Fed will meet its 2% inflation target.
"That is the moment where the Fed, I think, has a real dilemma," Timmer said, noting that the central bank would eventually need to decide if it would tolerate high prices or bring inflation down at the expense of employment.
"I don't think we're there yet, but we could get there at some point," he warned.