By Divya Choudhury and Lisa Pauline Mattackal

DAVOS (Switzerland) – As the U.S. Federal Reserve raises interest rates to combat a slower economy and deteriorating fundamentals, Scott Minerd, Global Chief Investment Officer at Guggenheim Partners, said Tuesday.

Minerd stated that the neutral rate was likely lower than the Fed believes it to be… By June, the Fed funds rates are expected to hover around 1.75%. Any tightening beyond this would be restrictive,” Minerd told the World Economic Forum in Davos.

He said that policymakers underestimate the impact of shrinking central banks’ balance sheets while simultaneously raising rates in their attempts to control inflation. Market participants also misunderstood these risks.

According to current market prices, the Federal Funds Rate will be between 2.75 and 3.05% by 2022.

Minerd feels that a recession is possible if Fed moves to more accommodative policy by the end the year. He anticipates one, however, in 2023.

Guggenheim manages more than $325B in assets and Guggenheim is overweight with corporate credit. He prefers current values in the investment grade space to higher risk, high-yield debt.

Minerd considers the worsening of financial conditions to be especially apparent in credit markets. Minerd cites Carvana, an online used-car marketplace, for its bond offering in January. Apollo Global Management, (NYSE:), intervened before Carvana was able to find buyers.

According to him, “Anecdotal evidence shows that banks are leaving the leveraged loan marketplace due to losses related with Carvana,” he stated.

Minerd indicated that Guggenheim is taking a bearish approach to equity markets. Minerd also stated that his top priority was to decrease equity beta (or volatility) relative to the general stock market.

He said that Guggenheim’s portfolio of special-purpose acquisition companies (SPACs), which has experienced significant volatility in the past year, outperformed other stock markets.

This interview was done in the Reuters Global Markets Forum. Register for GMF via Refinitiv Messenger