One of the bond market's biggest players has a message for the Federal Reserve as it ponders its decision on interest rates.
Pimco's Tony Crescenzi said the Fed must not shy away from raising rates this year. If it does, it could mark the return of "bond market vigilantes."
That's the term given to investors who protest inflationary policies by selling bonds. This, in turn, pushes yields higher, and could create serious headwinds.
"What's very important to the Fed is to control the bond market vigilantes," Pimco's market strategist and portfolio manager said Tuesday on CNBC's "Futures Now." "Keep them from worrying about inflation."
The central bank announces its decision on interest rates at 2 p.m. ET Wednesday.
The Fed, he says, can accomplish this by sounding hawkish, showing resolve against inflation and raising interest rates when the bond market and the stock market says it's OK to do so. Otherwise, Crescenzi believes the 2013 "taper tantrum" highs would be the next major stop for 10-year Treasury yields.
The 10-year yield hit an intraday high on Tuesday of 2.639 percent — the highest since the day after the last Fed meeting.
The futures market is forecasting a nearly 100 percent chance later Wednesday of a rate hike, according to the CME Group. The last 25-basis point hike, announced on Dec. 14, lifted the Fed funds target rate to 0.50 to 0.75 percent, a number that's still considered historically low.
Pimco's official projection calls for two to three hikes this year, and a similar amount next year.
"The market still thinks that the Fed in the year 2020 will have its policy rate somewhere around 2 percent or so," Crescenzi said.
Overall, he's optimistic on the strength of the economy. Yet he's "leery" of the White House's ability to permanently boost U.S. growth. Even if tax cuts become a reality under President Donald Trump, they may not last, and that could create an issue down the line, he said.
"Markets are in particular priced for tax reform," Crescenzi added. "But households have to feel confident about tax cuts staying permanent. This means then in a sense that the Republicans will stay in power for at least four years, and the tax cuts won't sunset too quickly."