Mark Mobius warns that US interest rates will hit 9% if inflation persists


(Bloomberg) – The Federal Reserve’s fight against inflation has led veteran fund manager Mark Mobius to warn that interest rates will rise to 9%.

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“If inflation is 8%, the playbook says you need to raise rates higher than inflation, which means 9%,” the co-founder of Mobius Capital Partners told Bloomberg TV on Monday. While policymakers might not hike as aggressively if consumer prices were to fall, the 86-year-old investor said he doesn’t see inflation receding “anytime soon”.

The forecast is likely a benchmark of Taylor’s rule, a model that suggests an optimal policy rate given price and labor market pressures. The Fed is under pressure to handle the highest inflation in 40 years after last week’s September consumer price reading beat expectations. Other inflation readings have also remained elevated despite the Fed’s recent rate hikes.

Still, Mobius’ warning goes far beyond what the Fed — and rates markets — are now considering. Fed funds futures traders expect the rate to peak near 5% in March. Market expectations for the one-year inflation outlook fell from 6% in March to 3.2%, while the Bloomberg Commodities Index fell from a high in June on the back of slowing growth global economy.

Mobius also warned investors to be cautious with commodities as demand from some key buyers could cool.

“People buying commodities are sitting on increasingly weaker currencies,” he said, referring to emerging market and eurozone buyers. “You’re likely going to see a decline in commodity prices.”

Mobius, well known for its investments in emerging markets, said it was putting money to work in India, Taiwan, Brazil and “a bit in Turkey, and also in Vietnam”. He calls for caution vis-à-vis companies with high debt ratios and those with a low return on capital.

“Those are the two metrics that are very, very crucial these days because of this currency problem and high inflation,” he said.

(Updates with traders’ expectations for US interest rates, inflation in fourth paragraph.)

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