Kevin Flanagan, Head of Fixed Income Strategy
As was widely expected, the Fed kept the Fed Funds Rate target unchanged at the September FOMC meeting. As a result, the trading range remains at 5.25%–5.50%. While the policy makers continue to keep their options open for another potential rate hike before year-end, as I’ve said many times before, we are either at, or very close to, the end of this rate hike cycle.
When you look at the U.S. economy’s resilience thus far in 2023, given 525 basis points (bps) worth of rate hikes, it begs the question: is that all you got? That is precisely what Powell & Co will be contemplating as we move into the fourth quarter and head toward 2024. Against this backdrop, the Fed’s new mantra is to look at the totality of upcoming economic data releases to determine if their job is done.
While the money and bond markets await this data, it is important to remember that even if there are no new additional rate hikes forthcoming, the Fed appears to be united in its stance that rates need to remain in this restrictive territory for the foreseeable future. Hence, the “higher for longer” theme I’ve been consistently emphasizing.
On that front, the expectation for rate cuts has been completely turned on its head. As recently as the day after the May FOMC meeting, the implied probability for Fed Funds Futures already had the Fed cutting rates by now. Instead, we got one more rate hike and the markets are still not completely ruling out another increase at the November FOMC gathering. In addition, four months ago, Fed Funds Futures were looking for the target rate to be under the 4% threshold by January of next year. As of this writing, the implied probability still has Fed Funds over 4.50% by the end of 2024! Along the same lines, while the Fed’s dot plot garners a great deal of attention as well, as with Fed Funds Futures, investors have witnessed how unreliable these two forecasting tools can be.
Whether or not another rate hike is in the cards, quantitative tightening (QT) continues unabated. The Fed continues on its mission to reduce its holdings of Treasuries and mortgage-backed securities (MBS) on its balance sheet. Although this means of tightening policy has essentially gone under the radar (much like the Fed had hoped), it is a part of the policy makers’ toolkit that should not be ignored.
The Bottom Line
Regardless of whether the Fed is now officially done or not from a rate hike perspective, the end result of this cycle will be that interest rates are now at levels a generation of investors have not witnessed before. In addition, the higher for longer theme creates a whole new dynamic to consider in your fixed income portfolio decision-making process.
This post first appeared on September 20th, 2023 on the WisdomTree blog
PHOTO CREDIT: https://www.shutterstock.com/g/pabrady63
U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see the prospectus for discussion of risks.
Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each entity involved in compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties. With respect to this information, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including loss profits) or any other damages (www.msci.com)
Jonathan Steinberg, Jeremy Schwartz, Rick Harper, Christopher Gannatti, Bradley Krom, Kevin Flanagan, Brendan Loftus, Joseph Tenaglia, Jeff Weniger, Matt Wagner, Alejandro Saltiel, Ryan Krystopowicz, Brian Manby, and Scott Welch are registered representatives of Foreside Fund Services, LLC.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.
You cannot invest directly in an index.