By Kevin Flanagan
Head of Fixed Income Strategy
At last month’s FOMC meeting, the Fed hit the pause button for the first time since it began raising rates in March of last year. As a result, speculation began to intensify about what the policy maker’s next move could be or whether it would take a breather for a while and see what 500 basis points (bps) worth of rate hikes has done to the economic and inflationary setting. Well, after hearing from Chairman Powell in the weeks following the June Fed gathering, one could be forgiven for thinking the FOMC may just be “skipping the pause” part and getting right back to rate hikes.
The question I keep coming back to is whether Powell & Co. are seriously considering raising the Fed Funds Rate as soon as this month’s policy meeting or was the Chairman just trying to send a message to the markets—the Treasury arena in particular—that yields needed to be adjusted for a higher for longer scenario and not rate cuts. If you think about it, if it was the “messaging” option, why not just emphasize that rate cuts are off the table and not even being considered? Well, Powell essentially did say that and took it to the next level by saying two more rate hikes “may be appropriate.”
Now let’s turn our attention to last week’s developments. The Fed Chair has been consistently mentioning how the majority of policy makers see two more rate hikes this year, as evidenced by the shift in the “dot plot” at the June FOMC meeting. In other words, the Fed’s median estimate for Fed Funds has been increased by 50 bps to 5.60% as compared to the prior projection in March. However, Powell went even further at last week’s European Central Bank forum in Sintra, Portugal, when he said he wouldn’t take consecutive rate increases off the table, presumably at the July and September Fed convocations.
So, let’s summarize: the Fed went from pausing its rate hikes in June to now potentially raising rates at each of the next two scheduled FOMC meetings. I’m sorry, but I can’t help but wonder why did the Fed even pause then? I mean, if you’re apparently leaning in the direction of raising rates one or two more times, why not just rip the band-aid off and do it in June and go from there? From an economic/inflation data perspective, did the policy maker really think that much was going to change between meetings?
Conclusion
Needless to say, these developments only highlight our thoughts that volatility is going to remain elevated in the money and bond markets. In addition, it also underscores our point of preferring to be late rather than early to the duration party. Stay tuned…it looks like “Fed-watching” is going to be an intriguing endeavor for the second summer in a row.
Originally published by WisdomTree on July 5, 2023.
For more news, information, and analysis, visit the Modern Alpha Channel.
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 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.