JPMorgan’s Michele Says It’s Time to Exit ‘Cash Trap’ and Move Into Bonds

(Bloomberg) — It’s time to exit the “cash trap” of money market funds and move into bonds as the Federal Reserve is set to pause its rate-hike campaign and then cut as soon as September, according to Wall Street veteran Bob Michele.

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“If we are right and we’ve seen the last Fed rate hike and the market starts pricing in rate cuts and they start cutting rates, then those cash returns will start to evaporate,” Michele told Bloomberg Television’s The Open on Wednesday. With a switch to bonds, “you will have locked in not only the carry but will also get some capital appreciation,” he said.

The chief investment officer for global fixed income at JPMorgan Investment Management Inc., who has previously recommended five-year Treasuries and US investment-grade corporate bonds, said the central bank is set to hold rates “where they are” when its policy-setting committee meets on Wednesday. Michele sees the US economy entering a recession within a year as unemployment rises.

“Unemployment at 4.5% is recession, I don’t think there’s ever been a jump of 1.1% in unemployment and the NBER (National Bureau of Economic Research) hasn’t come in and said we’re in recession,” Michele said. “So the Fed is predicting recession there.”

Price pressures haunting the Fed will continue to fade, according to Michele, who sees the disinflationary trend as “intact.” Tuesday’s consumer price index report showed inflation decelerating, followed by US producer prices declining in May, bolstering expectations that the Fed will be on hold this month.

The market for wagers on the outlook for central bank policy shows traders now expect the benchmark rate to peak in September, instead of July.

“We have never gone from the last rate hike to recession without the Fed cutting rates before then,” Michele said. “If everything we are seeing is telling us a recession by year-end, I am still sticking with September as the first rate cut.”