The Fed and Data Dependency With Richard Bernstein Advisors

It’s often said that the Fed is “data-dependent” in its interest rate decision-making process. This phrase undoubtedly frustrates advisors and retail investors alike.

The near-term outlook for data dependency is potentially confusing to many ordinary investors because while the May jobs report was surprisingly sturdy, manufacturing data is slack and inflation remains stubbornly high. What that means for interest rates in the back half of 2023, only the Fed knows, but prevailing wisdom holds that the next meeting of the Federal Open Market Committee (FOMC) will result in neither a rate hike nor cut.

Michael Contopoulos, Richard Bernstein Advisors director of fixed income, provided some insight as to what data dependency means to investors and what the Fed’s next steps could be.

“Well, I think it comes down to labor,” he said in a recent interview with Jonathan Ferro of Bloomberg. “That’s (the May jobs report) is going to be the big determining factor in what they (the Fed) do in June. If you blow out of the water, I don’t see how you skip the June meeting. I think you have to hike.”

According to the Labor Department, the U.S. economy added 339,000 jobs last month, easily topping economists’ estimates of 195,000. A beat like that could be a “blowout” number that compels the Fed to consider a rate increase.

Other Macroeconomic Data Points to Ponder

Following the Fed’s most recent rate hike of 25 basis points, expectations were in place that the central bank would take its foot of the tightening gas pedal in the back half of 2023 with an eye toward possible rate easing next year.

Noting that core inflation remains stuck in a range well above the Fed’s desired target, Contopoulos observed that the central bank’s hands may be tied.

“It’s clear the manufacturing side of economy is weakening and it’s clear growth isn’t going like gangbusters,” he said in the Bloomberg interview. “But, with that said, the service side of the economy is doing quite well. I don’t understand how the Fed doesn’t go (hike) in the June meeting.”

The Richard Bernstein Advisors director of fixed income did acknowledge that the Fed may be leaning toward leaving rates where they are today at the June meeting.

If that proves accurate and that’s the course of action the central bank takes for the remainder of 2023, exchange traded funds such as the iMGP RBA Responsible Global Allocation ETF (IRBA), which includes equity and fixed income allocations, could benefit.

For more news, information, and analysis, visit the Richard Bernstein Advisors Channel.