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The Fed's Timeline Over the last three years, in the wake of unique economic circumstances, it has been easy to get lost in the mountains of data, opinions and predictions. Looking at the timeline of events helps bring the facts back into focus. Following a historic rate environment where rates were slashed to effectively zero, here’s where we stand:
 Along the way, markets have attempted to read between the lines and get out ahead of any potential rate moves. It created a sort of bizarre evaluation of the economy, where “bad news” is treated as “good news”. That is to say, any soft data signaled a potential start to the Fed cutting and lower rates. However, the economy has proven resilient, spending and borrowing have continued, inflation remains more stubborn than initially believed, and any red flags or troublesome indicators have largely been ignored. Regardless, there aren’t many out there that see these interest rate levels as sustainable over a significant time horizon. Banks across the country are still feeling the effects of this hiking cycle in the form of tighter credit, unrealized losses and limited liquidity.
You’ve probably heard “higher for longer” a few times in recent months. It’s the new buzz phrase as the Fed attempts to recalibrate expectations. Just three months ago, the March meeting was supposed to be the crucial pivot point where the tides shifted and the overnight rate was adjusted lower. Seven to eight cuts were being priced in for 2024 and the bond market was primed for liftoff. Now, it’s a different story. Cuts are still priced in for this calendar year, but the bets are less auspicious. Three cuts are now the expectation between now and December, with the first one in July. (Source: Bloomberg, LP)  The Fed has added a new wrinkle by lengthening their timeline, and thus extending the window to capture fixed income yield. But, it’s important to note that market expectations are almost constantly shifting, and we’ve seen how quickly that can happen. Despite the recent change in perception regarding interest rates, remember this is a market anxious to revert back to easier financial conditions. The opportunity to increase portfolio yield is still available, but it shouldn’t come as a shock when, sooner rather than later, that opportunity isn’t nearly as attractive or disappears entirely. “Higher for longer” may be the talk now, but what about later?  |
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