With benchmark rates in restrictive territory – meaning there is less cash available in the economy – “it’s now a matter of balancing between breaking too many things versus not breaking anything”, the fund manager says.

In some jurisdictions, however, it could be a fine line: “Breakage doesn’t need to cause a systemic crisis and a banking crisis is not part of the equation.”

The zone

The instability in the US lending sector is precisely the reason Pimco argues the Fed could pause temporarily.

Mead says the main takeaway from the Silicon Valley Bank failure is that financial conditions have clearly tightened, and the Fed can do less than previously indicated.

He is still tipping an increase at the Fed’s March policy meeting as the central bank aims to get inflation back to its target. “We are probably more skewed towards a 25 basis points hike.”

Beyond that, Pimco believes it is likely the Fed needs to do more but not a lot more given it is already well into “the zone of policy normalisation”. The Fed funds rate currently stands at 4.5 per cent to 4.75 per cent.

Forecasting the peak rate is one thing, but the key is assessing how long rates will stay tight. “Understanding when enough is enough is way more important,” he says.

The worst-case scenario, Mead argues, is when policymakers cut rates too early and fail to rein in inflation because they have to start tightening again.

In the end, consumers end up with much higher rates and no inflation relief – the worst combination possible. “It’s better to get rates higher [the first time] and ensure inflation comes back to target. At least the pain of higher rates is worth it,” he says.

Over the medium term, Mead says the Fed’s fine-tuning of policy may bring a small rate increase or even a cut, but stressed that policy will remain on the restrictive side for an extended period. “This could mean another 12 months,” he says, adding that an easing cycle is a long way off, perhaps “years away”.

Limpidity

Mead notes it is easier to calibrate tightening in Australia because of the structure of its economy. Two-thirds of Australians own a piece of land and the vast majority of mortgages have variable rates, making the transmission of monetary policy extremely efficient. Also helping is the fact that lenders have to mark-to-market, meaning they have a timely appraisal of their balance sheet based on current market conditions.

This is particularly useful when $400 billion worth of fixed-rate mortgages roll off to variable rates this year in the so-called “mortgage cliff” when borrowers see their interest rates jump from 2 per cent to close to 6 per cent.

Such a backdrop makes it easier for a central bank to estimate the likely impact on the housing market and consumer spending.

“It’s somewhat transparent,” he says.

Pimco believes that the RBA’s current cash rate of 3.6 per cent is in the “zone of policy normalisation”.

Based on the last Australian policy tightening cycle in 2012, the bond giant thinks a policy rate of 4 per cent – if it gets there – would be the most restrictive for household disposable incomes.

“We’ve had a view for a long time that if the RBA gets to the 3.75 per cent to 4 per cent range, that will be sufficient,” says Mead.

A-team

His first job was as a credit analyst at storied funds management company Bankers Trust. He became quickly hooked.

The major turning point in his career was when JPMorgan Asset Management transferred him from Melbourne to New York to start an investment-grade research team. His employer changed names several times reflecting the buying frenzy of the 90s. He started out with Salomon Smith Barney Asset Management, which eventually merged with Citigroup after the amalgamation of Citicorp and financial conglomerate Travelers Group.

“I had four business cards over 18 months.”

Mead’s job consisted of hiring experienced professionals, largely from other fund management outfits, to build a team. Back then, Salomon Smith Barney only had research capacity in high-yield and emerging markets.

“I was by far the youngest in the team and I learned about how to manage different personalities,” he recalls. His people management strategy was simple: to hire the best so that you are surrounded by highly qualified and experienced staff, even if it means they know more than you.

Some managers feel threatened by that prospect. “That’s the worst mistake,” he reckons.

Mead was in the US on September 11, 2001 when the World Trade Centre was attacked. By chance, he was working in the company’s Connecticut office that day. His former spouse was 8.5 months pregnant at their home in Union Square in Manhattan. A colleague offered to drive him home, but only as far as the Bronx.

On the long walk home, he was struck by the number of people covered in soot and dust, having drinks in outside bars. “Because of the overwhelming shock, no one wanted to leave their colleagues,” he remembers. “It was surreal.”