Based upon Fed public appearances and official press releases, it appears the FOMC is also rethinking future policy moves. With the upper band of the Fed Funds target range now at 2%, some officials have been questioning just how many more rate hikes will be needed in this cycle. One topic that has garnered increasing attention from policy makers is the shape of the yield curve. Various Fed members have stated that they are watching the yield curve very carefully and have also expressed their concern about not inducing an inverted construct due to FOMC rate hikes. However, one Fed official whose voice may carry more weight going forward, soon-to-be-N.Y. Fed President John Williams, has stated that he is also watching the yield curve but is not necessarily worried about how flat it is at this time.
Another hot-button topic is the Fed’s forward guidance language, which is included in the FOMC policy statement. This subject was brought to light in the May FOMC minutes and received further attention recently from Fed Chairman Jerome Powell and Williams. The bottom line is that there is a growing sentiment that this policy tool might be past its shelf life, or in other words, it is not needed anymore, especially as the Fed Funds Rate gets closer to what is considered neutral. At the recently concluded June meeting, the voting members did deliver on this front by removing the forward guidance language in their policy statement.
Conclusion
Given the Fed’s guidance and market outlook for additional increases in the Fed Funds Rate in 2018, if not beyond, some Fed protection seems warranted. Against this backdrop, we believe that by utilizing a floating rate product, such as the WisdomTree Bloomberg Floating Rate Treasury Fund (USFR), investors may be better able to insulate their bond portfolios and focus on yield enhancement with essentially no duration.
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