With the Federal Reserve signaling that it is on pace to shrink its balance sheets and raise interest rates, fixed-income investors may think about alternative investment options to hedge against rate risks.
After over a decade of a zero-interest-rate policy, the Fed has issued two quarter-percent rate hikes and brought the federal funds rate up to 1% for the first time since 2008.
The Federal Open Market Committee, or FOMC, has also indicated that the upward rate trend will likely continue, with some officials in recent weeks supporting the notion that the economy will be strong enough to warrant two more quarter-percentage-point rate hikes this year. Fed officials also moved toward a consensus on a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later this year.
Supporting the rate outlook, the U.S. is seeing increased economic growth, rising inflation and greater employment numbers. Inflation briefly exceeded the Fed’s 2% target in February but dipped in March to 1.8%. Meanwhile, the unemployment rate fell to 4.4% or at the bottom range of officials’ expectations.
Market observers and investors will have to watch the next Fed meeting in June 13 to 14 for further clarity on the central bank’s monetary policy. Traders in futures markets already placed about an 80% probability on a Fed rate hike by June.