Quick View: How to interpret the Fed’s latest policy meeting
The Federal Reserve (Fed) left rates unchanged, quelled the idea of a rate hike, and announced plans to slow the tapering of its balance sheet. Portfolio Manager Seth Meyer dissects the Fed’s decision and discusses the relevance for investors.
4 minute watch
Key takeaways:
- While the Federal Reserve (Fed) elected to hold rates steady, it quashed any fears that its next move could be a rate hike while also announcing it would slow the tapering of its balance sheet.
- Despite some stickiness in recent months, inflation has continued its downward trend over the past year – a clear sign that restrictive policy is working, albeit at a slower pace than markets had been anticipating. As such, we believe the question surrounding rate cuts is not one of if, but rather, when.
- While much attention has been given to the expected path of rate cuts, we believe investors need not allow their investment decisions to hinge on such projections. In our view, with rate hikes now firmly out of the picture, investors should lean into the higher yields on offer while awaiting eventual cuts.
Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics.
Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.
Personal Consumption Expenditure (PCE) A measure of how much consumers in the US spend on goods and services. It constitutes a significant component of overall GDP.
Volatility The rate and extent at which the price of a portfolio, security or index, moves up and down.
Yield: The level of income on a security over a set period, typically expressed as a percentage rate. For a bond, this is calculated as the coupon payment divided by the current bond price.
IMPORTANT INFORMATION
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Seth Meyer: Hi, I’m Seth Meyer, Fixed Income Portfolio Manager here at Janus Henderson, giving you a quick update and quick takeaways in what we saw in the Fed meeting today.
Nothing really changed in regards to what the Fed was expecting or what the market was expecting. The fact that the markets had really started pricing in the potential that the Fed was going to utter the word that we didn’t want to hear, which was “hike” … the Fed went out of their way today to tell us that not only is a hike completely out of the question, but in most cases and in most scenarios, a cut is most likely. Now, when you think about what they were forecasting in March, which was three cuts, or at the start of the year, which was six, we’re significantly lower than that number, which is clear.
Where does the number actually shake out? Most likely, somewhere between zero and one for the year is probably where the Fed thinks they’re going to end up. The reasons are clear: Inflation is running hotter than expected to start the year. Whether you’re looking at CPI [Consumer Price Index] or the Fed’s preferred measure, which is PCE [Personal Consumption Expenditures], inflation is hotter than they expected. The stickiness of where we’re seeing the inflation pressures are also worrisome.
Economic growth remains relatively resilient – and actually, employment remains relatively strong. Both of those things the Fed is actually really comfortable with. I think what the Fed is really trying to do and really trying to position is just [to] buy time. As I think about sort of outlooks and forecasts and thinking about where the Fed can take rates, it’s about just holding on and waiting to see if they’ve done enough.
Is five and 3/8, in the midpoint of their range, enough to actually start solving this inflation riddle that they’ve been fighting now for quite some time? That remains to be seen. It’s very clear by the conversations today, whether it be in the release or the press conference, that the word “hike” was not only not discussed, but wasn’t something they were thinking about.
The only real new news that we had from the Fed release was actually the continued runoff of their balance sheet, just at a slower rate. They’ve chosen to leave their mortgage runoff rate exactly the same as where they were before, but actually reduce their Treasury runoff from $60 billion to $25 billion per month. So, although they continue to reduce the aggregate size of the balance sheet, they’ve chosen to do it in a slower manner.
At Janus Henderson, we still do believe that the Fed’s restrictive policy is slowing economic growth and is curtailing inflation, but it is clear it’s doing it at a slower rate than what we saw at the end of 2023. We also believe that patience is the right remedy. We believe right now that the longer we stay restrictive, the more likely it is the Fed does eventually get back to their 2% target.
As we look forward and we think about the deployment of capital from an investor perspective, a multi-sector approach to this fixed income market is really what we believe in to generate the best risk-adjusted returns. The key reason is the volatility the Fed is creating in the fixed income markets today is creating numerous opportunities, whether it be comparing securitized assets versus corporate credit or really leaning in on duration when you feel it’s appropriate.
Whether it’s higher for longer or higher for now, we think investors should really be leaning into these decade-high yields.
Related insights
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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4 minute watch
Key takeaways:
- While the Federal Reserve (Fed) elected to hold rates steady, it quashed any fears that its next move could be a rate hike while also announcing it would slow the tapering of its balance sheet.
- Despite some stickiness in recent months, inflation has continued its downward trend over the past year – a clear sign that restrictive policy is working, albeit at a slower pace than markets had been anticipating. As such, we believe the question surrounding rate cuts is not one of if, but rather, when.
- While much attention has been given to the expected path of rate cuts, we believe investors need not allow their investment decisions to hinge on such projections. In our view, with rate hikes now firmly out of the picture, investors should lean into the higher yields on offer while awaiting eventual cuts.