This $480 Billion Manager Sees Tax Cut Spurring Over 4 Fed Hikes

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(Bloomberg) -- In the eyes of Bob Michele at J.P. Morgan Asset Management, the bond market should brace for a shock from the Federal Reserve if U.S. lawmakers manage to pass a tax-overhaul measure.

Just how many times could the Fed raise interest rates in 2018 if the legislation making its way through Congress becomes law? The median in a Bloomberg survey projects two hikes, after an expected increase this month. Policy makers’ own projections call for a hike this month and then three next year. Some analysts see four -- likely one at each meeting with a press conference.

Michele’s view is that even the hawkish contingent doesn’t go far enough.

“Tax reform, and then we’re talking more than four” hikes, Michele, who oversees about $476 billion as head of global fixed income, currency, and commodities at J.P. Morgan Asset, said on Bloomberg Television on Friday.

Without a jolt of fiscal stimulus, the terminal fed funds rate looked to be between 2 percent and 2.25 percent, he said.

Yet “if you get this tax reform through, it’s so stimulative for corporate America, it’s so stimulative for retail consumption, I’m going to raise that to 3 percent,” he said. “That’s still historically low.”

The 10-year Treasury yield is poised to climb above 3 percent, from about 2.39 percent now, with a tax measure passed and monetary stimulus being withdrawn globally, Michele said. The bond market was premature early this year in pricing in policy achievements out of Washington, he said.

Treasuries pared gains on Friday after two Republican senators, Ron Johnson of Wisconsin and Steve Daines of Montana, signaled support for the tax bill.

©2017 Bloomberg L.P.

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