The Federal Reserve's next move on monetary policy will be a rate hike as the U.S. economy remains strong and an overseas rebound may be at hand, according to Guggenheim Partners' chief investment officer.
"Some believe we may have seen the Federal Reserve's last rate hike in this cycle, and that the next step from here will be a cut in rates," said Scott Minerd in a note to clients released Monday afternoon. "I believe that view is plainly wrong."
Minerd, whose firm manages $265 billion in assets, said the U.S. economy is doing "just fine" while China's economic growth is back on track with both fiscal and monetary stimulus in place. Improving Chinese growth will also benefit Japan given their "close trading ties," he said. In Europe, the European Central Bank has adopted a more dovish stance after issuing cheap loans for banks in the region while German manufacturing should stabilize, Minerd added. "All this adds up to continued growth which will ultimately lead the Fed to increase rates again."
Minerd will be on CNBC with Brian Sullivan at 2:40 p.m. ET.
The Fed last hiked rates in December, sparking fears that the central bank may be tightening policy too fast, thus potentially triggering a recession. That hike contributed to a massive sell-off in the last month of 2018 and pushed the S&P 500 to its worst annual performance since 2008. At the time, Minerd said there was a 50% chance the Fed would cut rates in 2019.
This year, however, the central bank reversed course. The Fed does not expect to raise rates once this year. The market has gone a step further and started pricing in rate cuts. Market expectations for a rate cut in October are more than 52%, according to the CME Group's FedWatch tool.
The reversal sent equities flying. The S&P 500 is up more than 17% this year and hit an intraday record earlier on Monday.
Meanwhile, the U.S. economy is doing far better than expected to start off 2019. The U.S. economy grew at an annualized pace of 3.2% in the first quarter — its best start to a year since 2015 — the Commerce Department said Friday.
"Of course, markets will not wait for action by the Fed and will start to reprice in anticipation of possible future hikes," Minerd wrote. "Currently, the bond market is priced for an ease. Ultimately, the market will take that back and more by the fourth quarter, which will lead to a steepening in the yield curve in coming months."