AdviserVoiceCharles Tan Archives - AdviserVoice https://www.adviservoice.com.au/tag/charles-tan/ Financial planner information & financial planner education/CPD - AdviserVoice Tue, 28 Jul 2026 21:30:46 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 Fed leaves interest rates unchanged amid ongoing uncertainties https://www.adviservoice.com.au/2026/05/fed-leaves-interest-rates-unchanged-amid-ongoing-uncertainties/ https://www.adviservoice.com.au/2026/05/fed-leaves-interest-rates-unchanged-amid-ongoing-uncertainties/#respond Thu, 30 Apr 2026 21:20:26 +0000 https://www.adviservoice.com.au/?p=111114

Charles Tan

The Federal Reserve (Fed) kept its interest rate target unchanged on April 29 at a range of 3.5% to 3.75%, where it’s been since December. This was the final meeting of Jerome Powell’s eight-year tenure as Fed chair, with Kevin Warsh poised to take over next month. Powell noted that he would keep his position on the seven-member Fed board, which expires in 2028, for a “to-be-determined” period.

At his post-meeting press conference, Powell cited a recent uptick in inflation and uncertainty stemming from the Iran conflict as drivers of the Fed’s continued pause. He also noted that the U.S. economy continues to expand at a solid pace.

Fed keeps rate-cut bias in statement

At the March meeting, most Fed officials pencilled in slightly lower interest rates by the end of 2026. Since then, some policymakers have suggested that inflation risks could extend the pause in interest rates beyond year-end. Nevertheless, in the latest Fed statement, officials left in place language suggesting an easing bias, despite objections from four members — the most dissents since 1992.

Three officials agreed to the rate decision but opposed the language suggesting a rate cut is more likely than a rate hike. A fourth member favoured an interest rate cut.

This backdrop suggests Warsh will inherit an increasingly divided Fed as he seeks to usher in a new era. He is likely to introduce a range of reforms to the Fed’s balance sheet and forward guidance framework and provide new inflation measurement metrics.

Regarding the Fed’s dual mandate of promoting price stability and full employment, Warsh believes price stability should dominate. In his view, full employment depends on sustained price stability, and without it, the Fed fails in its other responsibilities. He also believes productivity gains from artificial intelligence (AI) should bolster growth without triggering high inflation.

U.S. economy on track for continued growth

Despite the uncertainties surrounding the Iran conflict, we believe the U.S. economy will grow this year. Many Asian and European countries that depend on Middle Eastern energy are struggling with supply disruptions that threaten their economic growth. Meanwhile, energy independence is helping to mitigate the oil supply shock in the U.S., which, combined with other factors, should minimize the economic fallout.

Core inflation pressures should subside

While the U.S. has an abundant supply of oil, it has been unable to escape the worldwide impact of higher global oil prices. Higher fuel prices have contributed to rising headline inflation, which climbed from 2.4% (annualized) in February to 3.3% in March. However, assuming the military conflict in Iran isn’t prolonged, we expect oil prices to moderate over time.

Core inflation, which excludes energy prices and is a key driver of Fed policy, has increased slightly, from 2.5% in February to 2.6% in March.1 We expect lower effective tariff rates to help keep core inflation relatively contained, though it likely will remain above the Fed’s 2% target.

Consumer-related data remain stable

The labour market, which, along with inflation, shapes the Fed’s interest rate policy, appears to have stabilized. In a low-hire/low-fire jobs environment, the unemployment rate eased slightly from 4.4% in February to 4.3% in March. Additionally, nonfarm payrolls rebounded in March to erase February’s job losses.

Furthermore, overall consumer spending remains healthy, with retail sales climbing across most categories in March. However, middle- and lower-income consumers continue to face pressures from the cumulative effects of higher prices over recent years.

Fiscal, monetary support aids economy

We also expect other factors to support and promote economic growth in 2026, including:

Tax cuts, federal deregulation and pro-growth fiscal policies outlined in last year’s One Big Beautiful Bill Act
A continuation and expansion of the technology capital spending surge
The cumulative effects of last year’s Fed rate cuts, which totalled 1.75 percentage points
Better clarity surrounding global trade policy

While our outlook generally remains upbeat, we can’t overlook the greatest risk to continued economic growth: stagflation.

An expanded military conflict in the Middle East could further aggravate the region’s already damaged energy infrastructure. A prolonged energy shortage could severely damage the global economy and trigger a slow-growth/high-inflation environment in the U.S.

What the current interest rate environment means for markets

We believe high-quality bond yields remain attractive in today’s interest rate environment. We expect the benchmark 10-year Treasury yield to remain in a range of 4% to 4.5% through year-end.

Additionally, last year’s Fed rate cuts and pro-growth fiscal policies have supported credit fundamentals, fuelling opportunities among select high-quality corporate bonds. We also expect corporate mergers and acquisitions activity to increase this year, lifting risk in some sectors and highlighting opportunities in others.

Outside the U.S., we favour government bonds in the U.K. and New Zealand. Weaker growth versus the U.S. and mispriced monetary policy are driving opportunities in these markets.

As always, we believe maintaining a broadly diversified investment portfolio is a sensible strategy regardless of the economic or geopolitical backdrop. Our experience suggests that investors who maintain their long-term strategies while remaining mindful of emerging opportunities may improve their risk/reward potential.

By Charles Tan, CIO

]]>

Charles Tan

The Federal Reserve (Fed) kept its interest rate target unchanged on April 29 at a range of 3.5% to 3.75%, where it’s been since December. This was the final meeting of Jerome Powell’s eight-year tenure as Fed chair, with Kevin Warsh poised to take over next month. Powell noted that he would keep his position on the seven-member Fed board, which expires in 2028, for a “to-be-determined” period.

At his post-meeting press conference, Powell cited a recent uptick in inflation and uncertainty stemming from the Iran conflict as drivers of the Fed’s continued pause. He also noted that the U.S. economy continues to expand at a solid pace.

Fed keeps rate-cut bias in statement

At the March meeting, most Fed officials pencilled in slightly lower interest rates by the end of 2026. Since then, some policymakers have suggested that inflation risks could extend the pause in interest rates beyond year-end. Nevertheless, in the latest Fed statement, officials left in place language suggesting an easing bias, despite objections from four members — the most dissents since 1992.

Three officials agreed to the rate decision but opposed the language suggesting a rate cut is more likely than a rate hike. A fourth member favoured an interest rate cut.

This backdrop suggests Warsh will inherit an increasingly divided Fed as he seeks to usher in a new era. He is likely to introduce a range of reforms to the Fed’s balance sheet and forward guidance framework and provide new inflation measurement metrics.

Regarding the Fed’s dual mandate of promoting price stability and full employment, Warsh believes price stability should dominate. In his view, full employment depends on sustained price stability, and without it, the Fed fails in its other responsibilities. He also believes productivity gains from artificial intelligence (AI) should bolster growth without triggering high inflation.

U.S. economy on track for continued growth

Despite the uncertainties surrounding the Iran conflict, we believe the U.S. economy will grow this year. Many Asian and European countries that depend on Middle Eastern energy are struggling with supply disruptions that threaten their economic growth. Meanwhile, energy independence is helping to mitigate the oil supply shock in the U.S., which, combined with other factors, should minimize the economic fallout.

Core inflation pressures should subside

While the U.S. has an abundant supply of oil, it has been unable to escape the worldwide impact of higher global oil prices. Higher fuel prices have contributed to rising headline inflation, which climbed from 2.4% (annualized) in February to 3.3% in March. However, assuming the military conflict in Iran isn’t prolonged, we expect oil prices to moderate over time.

Core inflation, which excludes energy prices and is a key driver of Fed policy, has increased slightly, from 2.5% in February to 2.6% in March.1 We expect lower effective tariff rates to help keep core inflation relatively contained, though it likely will remain above the Fed’s 2% target.

Consumer-related data remain stable

The labour market, which, along with inflation, shapes the Fed’s interest rate policy, appears to have stabilized. In a low-hire/low-fire jobs environment, the unemployment rate eased slightly from 4.4% in February to 4.3% in March. Additionally, nonfarm payrolls rebounded in March to erase February’s job losses.

Furthermore, overall consumer spending remains healthy, with retail sales climbing across most categories in March. However, middle- and lower-income consumers continue to face pressures from the cumulative effects of higher prices over recent years.

Fiscal, monetary support aids economy

We also expect other factors to support and promote economic growth in 2026, including:

Tax cuts, federal deregulation and pro-growth fiscal policies outlined in last year’s One Big Beautiful Bill Act
A continuation and expansion of the technology capital spending surge
The cumulative effects of last year’s Fed rate cuts, which totalled 1.75 percentage points
Better clarity surrounding global trade policy

While our outlook generally remains upbeat, we can’t overlook the greatest risk to continued economic growth: stagflation.

An expanded military conflict in the Middle East could further aggravate the region’s already damaged energy infrastructure. A prolonged energy shortage could severely damage the global economy and trigger a slow-growth/high-inflation environment in the U.S.

What the current interest rate environment means for markets

We believe high-quality bond yields remain attractive in today’s interest rate environment. We expect the benchmark 10-year Treasury yield to remain in a range of 4% to 4.5% through year-end.

Additionally, last year’s Fed rate cuts and pro-growth fiscal policies have supported credit fundamentals, fuelling opportunities among select high-quality corporate bonds. We also expect corporate mergers and acquisitions activity to increase this year, lifting risk in some sectors and highlighting opportunities in others.

Outside the U.S., we favour government bonds in the U.K. and New Zealand. Weaker growth versus the U.S. and mispriced monetary policy are driving opportunities in these markets.

As always, we believe maintaining a broadly diversified investment portfolio is a sensible strategy regardless of the economic or geopolitical backdrop. Our experience suggests that investors who maintain their long-term strategies while remaining mindful of emerging opportunities may improve their risk/reward potential.

By Charles Tan, CIO

The post Fed leaves interest rates unchanged amid ongoing uncertainties appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2026/05/fed-leaves-interest-rates-unchanged-amid-ongoing-uncertainties/feed/ 0 A slowing economy is a growing probability https://www.adviservoice.com.au/2025/05/a-slowing-economy-is-a-growing-probability/ https://www.adviservoice.com.au/2025/05/a-slowing-economy-is-a-growing-probability/#respond Tue, 27 May 2025 21:15:39 +0000 https://www.adviservoice.com.au/?p=103652

Charles Tan

We believe economic pressures from tariffs, still-high interest rates and persistent above-target inflation will stall the US economy over the next several months. For these reasons, we put the odds of a slowdown sharply higher than other possible economic scenarios.

  • Slowdown/Recession: Although we continue to believe below-trend growth (flat to slightly positive) is a likely near-term outcome, we also think recession is a growing possibility. We remain concerned about mounting consumer headwinds, including rising auto loan and credit card delinquencies, and sagging consumer sentiment.
  • Stagflation: The potential for higher inflation and weak economic growth has slipped back into our forecast. However, we think stagflation is much less likely than a slowdown or a recession.
  • Growth Surprise: We believe the chance of growth surprising to the upside has decreased significantly in recent weeks. We gauge this scenario, including above-trend economic growth, above-target inflation and tight financial conditions, as less likely than stagflation.

What would a slowdown/recession scenario mean for investors?

As the economy slows, U.S. Treasury yields will likely fall. We also expect credit spreads to widen.

While inflation should slowly moderate, we still expect tariffs to create temporary price bumps in the road. Overall, we believe the slowing economy will outweigh temporary price hikes, prompting the Federal Reserve (Fed) to resume its easing program by mid-year. We estimate the Fed will cut rates three or four times by year-end.

Slowdown/Recession: Potential Investment Implications

Fixed Income

In a slowdown/recession, investors should consider:

  • Shifting to shorter duration. We believe short-duration assets may help manage near-term interest rate volatility. Furthermore, along with generally offering higher yields than cash equivalents, short-duration assets also tend to offer price appreciation potential in a declining rate environment.
  • Balancing duration exposure. Core bond strategies with intermediate-duration exposure may offer diversification and potential performance advantages as rates broadly decline and equity market volatility rises.
  • Staying high in credit quality. In addition to delivering diversification to investor portfolios, a modest allocation to high-quality investment-grade credit may now provide more attractive yields. However, we believe credit selection is critical to avoid weaker, economically sensitive issuers.
  • Maintaining inflation protection. We believe inflation strategies still appear attractive, given that inflation expectations remain higher than average, largely due to tariff policy uncertainty.

Equities and real assets

In a slowdown/recession, investors should consider:

  • Emphasising quality stocks. Quality companies with higher profitability and healthy balance sheets may offer attractive potential. Investors tend to favor quality companies in more defensive sectors, such as utilities, health care and consumer staples. Additionally, we think select dividend-paying stocks that tend to provide consistent income streams are attractive.
  • Looking to sustainable growth. Companies with dependable, sustainable earnings growth have tended to outperform competitors with weaker earnings profiles during economic slowdowns. Economically sensitive value sectors, such as financials, industrials and energy, have tended to lag alongside lower growth expectations.
  • Treading carefully in the commodities market. As consumer and industrial demand wanes, commodities typically lose their luster. However, we believe gold may continue to shine amid falling interest rates and heightened economic and market uncertainty.
  • Maintaining selective exposure to real estate stocks. Lower interest rates may boost the attractiveness of real estate investment trusts (REITs) if growth doesn’t slow to recession levels. In such a scenario, we prefer to rely on our REIT managers to identify the best opportunities.

What would stagflation mean for investors?

In our view, stagflation would push the 10-year Treasury yield higher amid significant volatility as slow growth and high inflation collide. We also believe the two-year Treasury yield could increase as the Fed maintains tight financial conditions. Meanwhile, credit spreads may widen amid weak economic growth, particularly in the high-yield sector.

Stagflation: Potential Investment Implications

We believe stagflation is unlikely but slightly more possible than a growth surprise.

Fixed Income

If stagflation emerges, investors should consider:

  • Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
  • Focusing on quality credits. Higher-quality short-duration strategies may offer benefits if yield outweighs the effects of spread widening. Given the pressures on corporate fundamentals from inflation, rising rates and muted growth, a focus on credit quality will be important.

Equities and Real Assets

If stagflation emerges, investors should consider:

  • Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
  • Favouring quality stocks. In this challenging environment, we believe higher-quality companies with less debt, higher profit margins and reliable cash flows from operations should hold up better. We expect the market to reward firms with pricing power and unique competitive advantages.
  • Gauging commodities. Commodities have historically provided high average returns during periods of elevated and rising inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
  • Limiting exposure to real estate. As mortgage rates rise and the housing market slows, REITs may underperform their long-term averages.

What would a growth surprise mean for investors?

If economic growth surprises to the upside, inflation would likely remain above the Fed’s target. A growth surprise scenario could keep financial conditions tight and trigger renewed Fed rate hikes.

Growth surprise: potential investment implications

We believe there’s a slim chance economic growth will improve.

Fixed Income

If growth accelerates, investors should consider:

  • Focusing on credit-sensitive assets. Riskier fixed-income securities, including high-yield corporate bonds and bank loans, may offer attractive return potential when the economy is growing.
  • Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
  • Avoiding longer-duration assets. With the Fed in tightening mode, we expect longer-duration securities to underperform as interest rates rise.

Equities and real assets

If growth accelerates, investors should consider:

  • Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
  • Favouring cyclical stocks. Economically sensitive sectors, such as financials, communication services and industrials, have tended to benefit from strong economic activity.
  • Gauging commodities. Commodities have historically provided attractive returns during periods of economic growth and elevated inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
  • Adding exposure to real estate. REITs may outperform their long-term averages as the economy remains robust.

Tariffs: long-term goals vs. short-term economic effects

The Trump administration’s trade policy overhaul seeks three key longer-term goals:

  • Seeking economic security by reducing the nation’s dependence on foreign goods and promoting domestic production.
  • Establishing fair trade through policies that protect American industry and employees from unjust practices, including currency manipulation and bans on U.S. goods.
  • Reducing taxes and paying down the nation’s record-high debt by generating revenue through tariffs.

While these goals seem reasonable, some economists remain sceptical that the plan for achieving them will work. And many worry about the broader implications, including reduced imports and retaliation from trading partners.

In our view, even a relatively low level of tariffs could flatten U.S. economic growth and inflate prices. We also believe other aspects of Trump’s policy agenda, including tax cuts and deregulation, may not be enough to counteract the recessionary effects of tariffs.

Given the scenario that’s unfolded so far, Trump may back off some tariffs. He could also strike deals with key trading partners to lower tariffs, secure free trade and relocate more manufacturing to the U.S.

Meanwhile, speculation, economic uncertainty and market volatility will likely persist as tariff negotiations continue. But we believe it’s still possible to get through this upheaval without a major trade war.

What a stalling economy may mean for portfolio allocations

We believe maintaining a broadly diversified portfolio is a prudent policy as the economy slows or potentially contracts. In our experience, investors who maintain their long-term strategies may persevere as markets gyrate. However, we also believe specific investment characteristics deserve consideration in this environment.

For example, given mounting recession worries, we believe overweighting duration relative to market benchmarks may deliver advantages if interest rates fall and a flight to quality ensues. Additionally, select agency mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) offer defensive characteristics and attractive yields.

Among stocks, rather than focusing on growth versus value, we generally favour quality, such as dividend-paying companies in defensive sectors (health care, utilities, consumer staples). Additionally, sustainable growth companies with stable earnings and strong competitive advantages will likely be more resilient to trade disruptions and tariffs.

By Charles Tan (CIO, global fixed income), Richard Weiss (CIO, multi-asset strategies) and Nancy Pilotte (senior client portfolio manager, multi-asset strategies)

———–

[1] Fitch Ratings, April 23, 2025.
]]>

Charles Tan

We believe economic pressures from tariffs, still-high interest rates and persistent above-target inflation will stall the US economy over the next several months. For these reasons, we put the odds of a slowdown sharply higher than other possible economic scenarios.

  • Slowdown/Recession: Although we continue to believe below-trend growth (flat to slightly positive) is a likely near-term outcome, we also think recession is a growing possibility. We remain concerned about mounting consumer headwinds, including rising auto loan and credit card delinquencies, and sagging consumer sentiment.
  • Stagflation: The potential for higher inflation and weak economic growth has slipped back into our forecast. However, we think stagflation is much less likely than a slowdown or a recession.
  • Growth Surprise: We believe the chance of growth surprising to the upside has decreased significantly in recent weeks. We gauge this scenario, including above-trend economic growth, above-target inflation and tight financial conditions, as less likely than stagflation.

What would a slowdown/recession scenario mean for investors?

As the economy slows, U.S. Treasury yields will likely fall. We also expect credit spreads to widen.

While inflation should slowly moderate, we still expect tariffs to create temporary price bumps in the road. Overall, we believe the slowing economy will outweigh temporary price hikes, prompting the Federal Reserve (Fed) to resume its easing program by mid-year. We estimate the Fed will cut rates three or four times by year-end.

Slowdown/Recession: Potential Investment Implications

Fixed Income

In a slowdown/recession, investors should consider:

  • Shifting to shorter duration. We believe short-duration assets may help manage near-term interest rate volatility. Furthermore, along with generally offering higher yields than cash equivalents, short-duration assets also tend to offer price appreciation potential in a declining rate environment.
  • Balancing duration exposure. Core bond strategies with intermediate-duration exposure may offer diversification and potential performance advantages as rates broadly decline and equity market volatility rises.
  • Staying high in credit quality. In addition to delivering diversification to investor portfolios, a modest allocation to high-quality investment-grade credit may now provide more attractive yields. However, we believe credit selection is critical to avoid weaker, economically sensitive issuers.
  • Maintaining inflation protection. We believe inflation strategies still appear attractive, given that inflation expectations remain higher than average, largely due to tariff policy uncertainty.

Equities and real assets

In a slowdown/recession, investors should consider:

  • Emphasising quality stocks. Quality companies with higher profitability and healthy balance sheets may offer attractive potential. Investors tend to favor quality companies in more defensive sectors, such as utilities, health care and consumer staples. Additionally, we think select dividend-paying stocks that tend to provide consistent income streams are attractive.
  • Looking to sustainable growth. Companies with dependable, sustainable earnings growth have tended to outperform competitors with weaker earnings profiles during economic slowdowns. Economically sensitive value sectors, such as financials, industrials and energy, have tended to lag alongside lower growth expectations.
  • Treading carefully in the commodities market. As consumer and industrial demand wanes, commodities typically lose their luster. However, we believe gold may continue to shine amid falling interest rates and heightened economic and market uncertainty.
  • Maintaining selective exposure to real estate stocks. Lower interest rates may boost the attractiveness of real estate investment trusts (REITs) if growth doesn’t slow to recession levels. In such a scenario, we prefer to rely on our REIT managers to identify the best opportunities.

What would stagflation mean for investors?

In our view, stagflation would push the 10-year Treasury yield higher amid significant volatility as slow growth and high inflation collide. We also believe the two-year Treasury yield could increase as the Fed maintains tight financial conditions. Meanwhile, credit spreads may widen amid weak economic growth, particularly in the high-yield sector.

Stagflation: Potential Investment Implications

We believe stagflation is unlikely but slightly more possible than a growth surprise.

Fixed Income

If stagflation emerges, investors should consider:

  • Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
  • Focusing on quality credits. Higher-quality short-duration strategies may offer benefits if yield outweighs the effects of spread widening. Given the pressures on corporate fundamentals from inflation, rising rates and muted growth, a focus on credit quality will be important.

Equities and Real Assets

If stagflation emerges, investors should consider:

  • Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
  • Favouring quality stocks. In this challenging environment, we believe higher-quality companies with less debt, higher profit margins and reliable cash flows from operations should hold up better. We expect the market to reward firms with pricing power and unique competitive advantages.
  • Gauging commodities. Commodities have historically provided high average returns during periods of elevated and rising inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
  • Limiting exposure to real estate. As mortgage rates rise and the housing market slows, REITs may underperform their long-term averages.

What would a growth surprise mean for investors?

If economic growth surprises to the upside, inflation would likely remain above the Fed’s target. A growth surprise scenario could keep financial conditions tight and trigger renewed Fed rate hikes.

Growth surprise: potential investment implications

We believe there’s a slim chance economic growth will improve.

Fixed Income

If growth accelerates, investors should consider:

  • Focusing on credit-sensitive assets. Riskier fixed-income securities, including high-yield corporate bonds and bank loans, may offer attractive return potential when the economy is growing.
  • Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
  • Avoiding longer-duration assets. With the Fed in tightening mode, we expect longer-duration securities to underperform as interest rates rise.

Equities and real assets

If growth accelerates, investors should consider:

  • Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
  • Favouring cyclical stocks. Economically sensitive sectors, such as financials, communication services and industrials, have tended to benefit from strong economic activity.
  • Gauging commodities. Commodities have historically provided attractive returns during periods of economic growth and elevated inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
  • Adding exposure to real estate. REITs may outperform their long-term averages as the economy remains robust.

Tariffs: long-term goals vs. short-term economic effects

The Trump administration’s trade policy overhaul seeks three key longer-term goals:

  • Seeking economic security by reducing the nation’s dependence on foreign goods and promoting domestic production.
  • Establishing fair trade through policies that protect American industry and employees from unjust practices, including currency manipulation and bans on U.S. goods.
  • Reducing taxes and paying down the nation’s record-high debt by generating revenue through tariffs.

While these goals seem reasonable, some economists remain sceptical that the plan for achieving them will work. And many worry about the broader implications, including reduced imports and retaliation from trading partners.

In our view, even a relatively low level of tariffs could flatten U.S. economic growth and inflate prices. We also believe other aspects of Trump’s policy agenda, including tax cuts and deregulation, may not be enough to counteract the recessionary effects of tariffs.

Given the scenario that’s unfolded so far, Trump may back off some tariffs. He could also strike deals with key trading partners to lower tariffs, secure free trade and relocate more manufacturing to the U.S.

Meanwhile, speculation, economic uncertainty and market volatility will likely persist as tariff negotiations continue. But we believe it’s still possible to get through this upheaval without a major trade war.

What a stalling economy may mean for portfolio allocations

We believe maintaining a broadly diversified portfolio is a prudent policy as the economy slows or potentially contracts. In our experience, investors who maintain their long-term strategies may persevere as markets gyrate. However, we also believe specific investment characteristics deserve consideration in this environment.

For example, given mounting recession worries, we believe overweighting duration relative to market benchmarks may deliver advantages if interest rates fall and a flight to quality ensues. Additionally, select agency mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) offer defensive characteristics and attractive yields.

Among stocks, rather than focusing on growth versus value, we generally favour quality, such as dividend-paying companies in defensive sectors (health care, utilities, consumer staples). Additionally, sustainable growth companies with stable earnings and strong competitive advantages will likely be more resilient to trade disruptions and tariffs.

By Charles Tan (CIO, global fixed income), Richard Weiss (CIO, multi-asset strategies) and Nancy Pilotte (senior client portfolio manager, multi-asset strategies)

———–

[1] Fitch Ratings, April 23, 2025.

The post A slowing economy is a growing probability appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2025/05/a-slowing-economy-is-a-growing-probability/feed/ 0 CIO roundtable: Is the market too optimistic? https://www.adviservoice.com.au/2024/04/cio-roundtable-is-the-market-too-optimistic/ https://www.adviservoice.com.au/2024/04/cio-roundtable-is-the-market-too-optimistic/#respond Thu, 11 Apr 2024 21:50:16 +0000 https://www.adviservoice.com.au/?p=94971

Victor Zhang

FOMO, YOLO, HODL—whatever you call it, it appears the momentum factor took hold in the first quarter. The best-performing groups of stocks so far this year were related to bitcoin, high beta, obesity drugs and mega-cap technology. Optimism around artificial intelligence, progress on inflation as well as hopes for an economic soft landing and Fed rate cuts help explain the stock market rally. 

What’s next for the economy and the Fed? 

“Our best case for the next six months is economic slowdown and below-trend growth, which we have at about 80% probability.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

 After helping keep a recession at bay last year, consumers may be running out of steam. Our investment professionals expect consumer spending to tick down, the unemployment rate to inch up and the economy to cool off, which would allow the Fed to start cutting rates around the midyear—for a total of two to three cuts this year. Although recession is not the base case, it’s not beyond the realm of possibility later in the year or early next year. 

Lean into quality amid uncertainty

“In a slowdown of any magnitude, the way to go is quality, which means safety or caution.” Richard Weiss, Chief Investment Officer, Multi-Asset Strategies

Overall uncertainty is high given the economic, political and geopolitical backdrop. Unexpected events in any one of those arenas could ignite market volatility. Our investment professionals believe equity investors may want to shore up their defensive sector positions—ones that are typically stalwarts even in a slowdown or recession. 

In fixed income, bond yields in the high-quality space are at levels not seen in about 15 years. That means investors shouldn’t underestimate the roles high-quality Treasury, agency, mortgage-backed and corporate bond allocations may serve in portfolios.

Addressing a top-heavy stock market

“We still think there are long-term sustainable opportunities in U.S. large-cap [growth]. … That being said, there are plenty of other opportunities outside of that. Emerging markets and … small caps around the world are trading at valuations and prospects as if the world is already deep in a recession.” Victor Zhang, Chief Investment Officer, Senior Vice President

The top five stocks in the S&P 500® Index represent around 25% of the index—the most concentrated in recent history. It’s been a remarkable period dominated by the results of a handful of the largest stocks.

It can be challenging to look at the performance of small-cap and emerging markets over the last 10 years compared to other larger and developed markets. However, it may be time to reconsider these areas for their diversification benefits—especially if the much-anticipated soft-landing scenario of broader growth occurs.

Emerging Markets equity outlook

“We’re actually very optimistic in the emerging markets. … Valuations are really attractive. But even more important than that is that we’re seeing an opportunity for growth to start reaccelerating again. We started seeing it in the later part of 2023 and now looking into 2024, 2025.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

The emerging markets equity team has a positive outlook for the asset class. Many countries in Latin America have made considerable progress in tempering inflation because their central banks aggressively hiked interest rates well before their counterparts in developed markets.

With inflation pressure easing, monetary policy easing has begun and has the potential to propel economic growth. The region also appears positioned to take advantage of concerns around global supply chains and U.S.-China trade tensions. Moreover, Mexico stands to benefit from its proximity to the U.S., competitive labor costs, demographics and established manufacturing base.

Elsewhere in emerging markets, India looks well positioned with resilient domestic demand anchoring growth amid an improved macroeconomic environment. In the team’s view, Saudi Arabia also has a compelling long-term thesis based on structural reform that differentiates it from other commodity-heavy markets.

Furthermore, small-cap companies globally and in emerging markets appear inexpensive while benefiting from a kind of once-in-a-generation trend of nearshoring or reshoring as countries that companies look to bring supply chains closer to their customers.

What about China?

“Everything that’s related to travel seems to be positive. But other than that, more cautious in China.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

China faces continuing challenges to economic growth from the property market downturn, subdued household spending and lingering deflationary pressures. Our investment professionals believe growth this year will depend on improving consumer confidence, income growth and policy support. They expect growth to be similar to last year, a view supported by government statements and actions.

Why active fixed income

“What we really want to do is invest in improving credits. … We have to do our active security selection, issuer selection—so we believe hands down in favor of active in the fixed-income world.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

Credit spreads, both high-yield and investment-grade, are approaching all-time tight levels, and reinvestment risk looms large. But bond yields in the high-quality space are some of the highest since the Great Financial Crisis, whether it’s Treasury bills, mortgage-backed securities or high-quality corporate bonds. So, from a credit quality perspective, our Global Fixed Income team prefers high quality over low quality. From a sector perspective, structured credit is compelling.

Furthermore, the yield curve is still inverted (the longest inversion in history). which means you get paid more staying in the front end than the back end. Combining all these three perspectives, yield curve, structures and credit quality, our team finds short-duration, high-quality income-types of strategies—where historically it might yield 6%-7% without taking on much credit or duration risk—attractive in this current market environment.

For benchmark- or liability-driven fixed-income investors, a duration overweight appears attractive. The 10-year yield may fall in the low 3%-range if the economy slows down like the Fed wants and inflation moderates over the next six to nine months. Whether inflation can eventually get to 2% is unclear—that’s the No. 1 question on many investors’ minds.

By Victor Zhang, Patricia Ribeiro, Charles Tan, Richard Weiss, Mike Rode

]]>

Victor Zhang

FOMO, YOLO, HODL—whatever you call it, it appears the momentum factor took hold in the first quarter. The best-performing groups of stocks so far this year were related to bitcoin, high beta, obesity drugs and mega-cap technology. Optimism around artificial intelligence, progress on inflation as well as hopes for an economic soft landing and Fed rate cuts help explain the stock market rally. 

What’s next for the economy and the Fed? 

“Our best case for the next six months is economic slowdown and below-trend growth, which we have at about 80% probability.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

 After helping keep a recession at bay last year, consumers may be running out of steam. Our investment professionals expect consumer spending to tick down, the unemployment rate to inch up and the economy to cool off, which would allow the Fed to start cutting rates around the midyear—for a total of two to three cuts this year. Although recession is not the base case, it’s not beyond the realm of possibility later in the year or early next year. 

Lean into quality amid uncertainty

“In a slowdown of any magnitude, the way to go is quality, which means safety or caution.” Richard Weiss, Chief Investment Officer, Multi-Asset Strategies

Overall uncertainty is high given the economic, political and geopolitical backdrop. Unexpected events in any one of those arenas could ignite market volatility. Our investment professionals believe equity investors may want to shore up their defensive sector positions—ones that are typically stalwarts even in a slowdown or recession. 

In fixed income, bond yields in the high-quality space are at levels not seen in about 15 years. That means investors shouldn’t underestimate the roles high-quality Treasury, agency, mortgage-backed and corporate bond allocations may serve in portfolios.

Addressing a top-heavy stock market

“We still think there are long-term sustainable opportunities in U.S. large-cap [growth]. … That being said, there are plenty of other opportunities outside of that. Emerging markets and … small caps around the world are trading at valuations and prospects as if the world is already deep in a recession.” Victor Zhang, Chief Investment Officer, Senior Vice President

The top five stocks in the S&P 500® Index represent around 25% of the index—the most concentrated in recent history. It’s been a remarkable period dominated by the results of a handful of the largest stocks.

It can be challenging to look at the performance of small-cap and emerging markets over the last 10 years compared to other larger and developed markets. However, it may be time to reconsider these areas for their diversification benefits—especially if the much-anticipated soft-landing scenario of broader growth occurs.

Emerging Markets equity outlook

“We’re actually very optimistic in the emerging markets. … Valuations are really attractive. But even more important than that is that we’re seeing an opportunity for growth to start reaccelerating again. We started seeing it in the later part of 2023 and now looking into 2024, 2025.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

The emerging markets equity team has a positive outlook for the asset class. Many countries in Latin America have made considerable progress in tempering inflation because their central banks aggressively hiked interest rates well before their counterparts in developed markets.

With inflation pressure easing, monetary policy easing has begun and has the potential to propel economic growth. The region also appears positioned to take advantage of concerns around global supply chains and U.S.-China trade tensions. Moreover, Mexico stands to benefit from its proximity to the U.S., competitive labor costs, demographics and established manufacturing base.

Elsewhere in emerging markets, India looks well positioned with resilient domestic demand anchoring growth amid an improved macroeconomic environment. In the team’s view, Saudi Arabia also has a compelling long-term thesis based on structural reform that differentiates it from other commodity-heavy markets.

Furthermore, small-cap companies globally and in emerging markets appear inexpensive while benefiting from a kind of once-in-a-generation trend of nearshoring or reshoring as countries that companies look to bring supply chains closer to their customers.

What about China?

“Everything that’s related to travel seems to be positive. But other than that, more cautious in China.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

China faces continuing challenges to economic growth from the property market downturn, subdued household spending and lingering deflationary pressures. Our investment professionals believe growth this year will depend on improving consumer confidence, income growth and policy support. They expect growth to be similar to last year, a view supported by government statements and actions.

Why active fixed income

“What we really want to do is invest in improving credits. … We have to do our active security selection, issuer selection—so we believe hands down in favor of active in the fixed-income world.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

Credit spreads, both high-yield and investment-grade, are approaching all-time tight levels, and reinvestment risk looms large. But bond yields in the high-quality space are some of the highest since the Great Financial Crisis, whether it’s Treasury bills, mortgage-backed securities or high-quality corporate bonds. So, from a credit quality perspective, our Global Fixed Income team prefers high quality over low quality. From a sector perspective, structured credit is compelling.

Furthermore, the yield curve is still inverted (the longest inversion in history). which means you get paid more staying in the front end than the back end. Combining all these three perspectives, yield curve, structures and credit quality, our team finds short-duration, high-quality income-types of strategies—where historically it might yield 6%-7% without taking on much credit or duration risk—attractive in this current market environment.

For benchmark- or liability-driven fixed-income investors, a duration overweight appears attractive. The 10-year yield may fall in the low 3%-range if the economy slows down like the Fed wants and inflation moderates over the next six to nine months. Whether inflation can eventually get to 2% is unclear—that’s the No. 1 question on many investors’ minds.

By Victor Zhang, Patricia Ribeiro, Charles Tan, Richard Weiss, Mike Rode

The post CIO roundtable: Is the market too optimistic? appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2024/04/cio-roundtable-is-the-market-too-optimistic/feed/ 0 Fed sticks to rate cut outlook despite stubborn inflation https://www.adviservoice.com.au/2024/03/fed-sticks-to-rate-cut-outlook-despite-stubborn-inflation/ https://www.adviservoice.com.au/2024/03/fed-sticks-to-rate-cut-outlook-despite-stubborn-inflation/#respond Thu, 21 Mar 2024 20:45:07 +0000 https://www.adviservoice.com.au/?p=94662 Key takeaways
  • With inflation still climbing at an above-target rate, the Fed left its benchmark interest rate unchanged at the fifth straight monetary policy meeting.
  • Consumers are feeling the effects of multiyear-high interest rates and inflation, creating mounting pressures for the key driver of economic growth.
  • The combined effects of slowing consumer spending and a cooling job market should give the Fed room to start cutting rates later this year.

As expected, persistent inflation prompted the Federal Reserve (Fed) to leave interest rates unchanged on Wednesday, March 20. But the Fed believes its still-restrictive monetary policy will ultimately have the desired effects. Despite a February uptick in consumer prices, policymakers remain confident that inflation and economic data will slow sufficiently to warrant easing later this year.

The Fed left intact its projection for three interest rate cuts this year, even as economic growth remained firm and prices edged higher. Fed Chair Jerome Powell touted progress in slowing inflation but noted he still needs more confidence that the 2% target is within reach. He also indicated that policymakers expect economic, labor market and inflation data to slow gradually, leading to rate cuts later this year.

Bringing inflation back to target levels has been an ongoing challenge for the Fed and its peers. The European Central Bank left interest rates at their historically high levels at its March meeting. And most observers expect the Bank of England to keep its key lending rate at a 16-year high when policymakers meet on March 21.

Economy is likely to downshift

We expect the economy to slow to below-trend growth or even flatline this year. But we don’t foresee a rapid succession of rate cuts. Instead, we believe Fed policy will remain restrictive until its effects weaken consumer spending, the labor market and ultimately, the broad economy.

Consumers finally feeling the pinch

Consumer spending represents the largest driver of economic activity. According to the Federal Reserve Bank of St. Louis, it accounts for nearly 70% of the nation’s gross domestic product (GDP). Just as consumers largely kept the economy afloat in recent years, they will likely drive the pending pullback as their spending subsides.

Fed tightening has historically triggered changes in consumer behavior. The impact of the latest tightening cycle has been delayed, though, largely due to significant savings accumulated in the COVID era. However, the fallout from the Fed’s fastest rate-hike cycle in 40 years is starting to appear:

  • Savings are dwindling. The total excess savings U.S. consumers amassed during the pandemic, which supported a surge in post-pandemic spending, has shrunk. Excess savings totaled $2.1 trillion in August 2021 and likely plunged to $110 billion in January 2024.[1]
  • Wage growth is slowing. Wage growth peaked at all-time highs in mid-2022, fueling several quarters of solid economic growth.[2] Since then, overall wage growth has steadily declined, but still solid real wage growth remains a driver of consumption. We expect the rate to continue declining and settle near longer-term averages.
  • Debt is soaring. Total credit card debt recently surged to a record high, topping $1.1 trillion in the fourth quarter. Furthermore, total consumer debt jumped $212 billion in the fourth quarter to a fresh high of $17.5 trillion.[3]
  • Loan delinquency rates are rising. As we’ve mentioned previously, Fed policy has a lagging effect, which is evident in the consumer credit arena. As Figure 1 illustrates, credit card delinquencies spiked in mid-2023 – nearly one year after the Fed started raising rates – and remain on the rise. Auto loan delinquencies are slowly trending in the same direction.
Figure 1 | Loan Delinquencies Are on the Rise

Data from 1/31/2014 – 12/29/2023. Source: FactSet.

Job market conditions are normalising

In addition to persistent inflation, a robust job market has fueled the Fed’s restrictive bias.

However, recent data suggest labor market conditions may be easing.

  • Amid increasing layoffs, the U.S. unemployment rate ticked up to a two-year high of 3.9% in February from 3.7% in January.
  • In its February employment report, the government revised downward the number of jobs created in December and January by 167,000. This report marked the 11th downward revision in monthly job numbers since January 2024.[4]
  • The number of U.S. job openings declined 15% for the 12-month period ended January 31, 2024.[5]
  • U.S.-based companies announced 84,638 job cuts in February, up 3% from January and 9% from February 2023.[6]

Employees are staying put

Against this backdrop, the number of Americans quitting their jobs has dropped to historical averages after surging during the pandemic. The “quits rate,” which measures voluntary job resignations as a proportion of total employment, dropped in January to its lowest level since August 2020.[7]

This metric provides insight into how Americans view the job market. The quits rate typically rises when jobs are abundant, and employees feel confident about finding a new opportunity. Conversely, the quits rate usually declines when job openings fade and employees have few alternatives. 

Fed policy shift is likely by midyear

If these trends persist, the Fed will have little incentive to keep its target rate at the current 23-year high range of 5.25% to 5.5%. Consumers power the U.S. economy, and as wage growth slows and savings diminish, we expect GDP to succumb to weaker spending.

Additionally, the strength characterising the post-pandemic job market appears to be waning, potentially removing one of two factors keeping Fed policy restrictive. The other factor — inflation — remains higher than the Fed would like, but prices may ease further as spending slows and the economy weakens.

We still believe at least three Fed rate cuts are possible this year, with the first likely to arrive this summer.

]]> Key takeaways
  • With inflation still climbing at an above-target rate, the Fed left its benchmark interest rate unchanged at the fifth straight monetary policy meeting.
  • Consumers are feeling the effects of multiyear-high interest rates and inflation, creating mounting pressures for the key driver of economic growth.
  • The combined effects of slowing consumer spending and a cooling job market should give the Fed room to start cutting rates later this year.

As expected, persistent inflation prompted the Federal Reserve (Fed) to leave interest rates unchanged on Wednesday, March 20. But the Fed believes its still-restrictive monetary policy will ultimately have the desired effects. Despite a February uptick in consumer prices, policymakers remain confident that inflation and economic data will slow sufficiently to warrant easing later this year.

The Fed left intact its projection for three interest rate cuts this year, even as economic growth remained firm and prices edged higher. Fed Chair Jerome Powell touted progress in slowing inflation but noted he still needs more confidence that the 2% target is within reach. He also indicated that policymakers expect economic, labor market and inflation data to slow gradually, leading to rate cuts later this year.

Bringing inflation back to target levels has been an ongoing challenge for the Fed and its peers. The European Central Bank left interest rates at their historically high levels at its March meeting. And most observers expect the Bank of England to keep its key lending rate at a 16-year high when policymakers meet on March 21.

Economy is likely to downshift

We expect the economy to slow to below-trend growth or even flatline this year. But we don’t foresee a rapid succession of rate cuts. Instead, we believe Fed policy will remain restrictive until its effects weaken consumer spending, the labor market and ultimately, the broad economy.

Consumers finally feeling the pinch

Consumer spending represents the largest driver of economic activity. According to the Federal Reserve Bank of St. Louis, it accounts for nearly 70% of the nation’s gross domestic product (GDP). Just as consumers largely kept the economy afloat in recent years, they will likely drive the pending pullback as their spending subsides.

Fed tightening has historically triggered changes in consumer behavior. The impact of the latest tightening cycle has been delayed, though, largely due to significant savings accumulated in the COVID era. However, the fallout from the Fed’s fastest rate-hike cycle in 40 years is starting to appear:

  • Savings are dwindling. The total excess savings U.S. consumers amassed during the pandemic, which supported a surge in post-pandemic spending, has shrunk. Excess savings totaled $2.1 trillion in August 2021 and likely plunged to $110 billion in January 2024.[1]
  • Wage growth is slowing. Wage growth peaked at all-time highs in mid-2022, fueling several quarters of solid economic growth.[2] Since then, overall wage growth has steadily declined, but still solid real wage growth remains a driver of consumption. We expect the rate to continue declining and settle near longer-term averages.
  • Debt is soaring. Total credit card debt recently surged to a record high, topping $1.1 trillion in the fourth quarter. Furthermore, total consumer debt jumped $212 billion in the fourth quarter to a fresh high of $17.5 trillion.[3]
  • Loan delinquency rates are rising. As we’ve mentioned previously, Fed policy has a lagging effect, which is evident in the consumer credit arena. As Figure 1 illustrates, credit card delinquencies spiked in mid-2023 – nearly one year after the Fed started raising rates – and remain on the rise. Auto loan delinquencies are slowly trending in the same direction.
Figure 1 | Loan Delinquencies Are on the Rise

Data from 1/31/2014 – 12/29/2023. Source: FactSet.

Job market conditions are normalising

In addition to persistent inflation, a robust job market has fueled the Fed’s restrictive bias.

However, recent data suggest labor market conditions may be easing.

  • Amid increasing layoffs, the U.S. unemployment rate ticked up to a two-year high of 3.9% in February from 3.7% in January.
  • In its February employment report, the government revised downward the number of jobs created in December and January by 167,000. This report marked the 11th downward revision in monthly job numbers since January 2024.[4]
  • The number of U.S. job openings declined 15% for the 12-month period ended January 31, 2024.[5]
  • U.S.-based companies announced 84,638 job cuts in February, up 3% from January and 9% from February 2023.[6]

Employees are staying put

Against this backdrop, the number of Americans quitting their jobs has dropped to historical averages after surging during the pandemic. The “quits rate,” which measures voluntary job resignations as a proportion of total employment, dropped in January to its lowest level since August 2020.[7]

This metric provides insight into how Americans view the job market. The quits rate typically rises when jobs are abundant, and employees feel confident about finding a new opportunity. Conversely, the quits rate usually declines when job openings fade and employees have few alternatives. 

Fed policy shift is likely by midyear

If these trends persist, the Fed will have little incentive to keep its target rate at the current 23-year high range of 5.25% to 5.5%. Consumers power the U.S. economy, and as wage growth slows and savings diminish, we expect GDP to succumb to weaker spending.

Additionally, the strength characterising the post-pandemic job market appears to be waning, potentially removing one of two factors keeping Fed policy restrictive. The other factor — inflation — remains higher than the Fed would like, but prices may ease further as spending slows and the economy weakens.

We still believe at least three Fed rate cuts are possible this year, with the first likely to arrive this summer.

The post Fed sticks to rate cut outlook despite stubborn inflation appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2024/03/fed-sticks-to-rate-cut-outlook-despite-stubborn-inflation/feed/ 0 US Fed tightening campaign ‘likely over’ https://www.adviservoice.com.au/2023/11/us-fed-tightening-campaign-likely-over/ https://www.adviservoice.com.au/2023/11/us-fed-tightening-campaign-likely-over/#respond Mon, 06 Nov 2023 20:35:50 +0000 https://www.adviservoice.com.au/?p=92280

The compounding effects of higher rates and consumer prices ultimately will stifle the labour market and the economy, flipping the Fed.

“The Fed’s inflation and labour market concerns are overstated, and additional rate hikes won’t be necessary. Continued progress in controlling inflation prompted the Fed to once again hold interest rates steady at a 22-year high. [Last] Wednesday’s decision marked the Fed’s second consecutive pause — and the third overall — in its 19-month tightening campaign.

“The Fed paused despite robust economic growth, suggesting the government’s latest GDP data may reflect an anomaly. In its first estimate of third-quarter economic output, the Commerce Department reported the economy grew 4.9 per cent (annualised), the fastest pace in nearly two years. But the surge was largely due to consumers’ summer spending sprees and a jump in inventory investments, which likely aren’t sustainable.

“A still-strong labour market and persistent above-target inflation have largely accounted for the Fed’s hawkish tone. However, since raising short-term interest rates to a range of 5.25 per cent–5.5 per cent in July, policymakers have adopted a wait-and-see approach to additional increases. The compounding effects of higher rates and consumer prices ultimately will stifle the labour market and the economy, flipping the Fed.

“While the Fed left its future policy options open, the central bank’s tightening campaign is likely over. With Treasury yields soaring recently to 16-year highs, the bond market is doing its part, alongside the Fed, to tighten financial conditions. The yield on the ten-year Treasury note, a benchmark for mortgage and other consumer lending rates, recently topped five per cent for the first time since 2007.

“The labour market is a main factor guiding the Fed’s holding pattern. Resilient job creation and the relatively low unemployment rate continue to fuel inflation worries and complicate its interest rate outlook.

“Mounting conflicts between management and labour underscore an unfolding structural economic shift over the coming years. Growing demands for higher wages across industries will likely reshape the capital/ labour relationship to favour labour over capital.

“This pending dynamic also supports our long-term inflation view. With labour taking precedence, inflation likely will settle higher than the Fed’s current two per cent target. We expect this trend to emerge over the next three to five years and persist from there.”

By Charles Tan, co-chief investment officer – global fixed income

]]>

The compounding effects of higher rates and consumer prices ultimately will stifle the labour market and the economy, flipping the Fed.

“The Fed’s inflation and labour market concerns are overstated, and additional rate hikes won’t be necessary. Continued progress in controlling inflation prompted the Fed to once again hold interest rates steady at a 22-year high. [Last] Wednesday’s decision marked the Fed’s second consecutive pause — and the third overall — in its 19-month tightening campaign.

“The Fed paused despite robust economic growth, suggesting the government’s latest GDP data may reflect an anomaly. In its first estimate of third-quarter economic output, the Commerce Department reported the economy grew 4.9 per cent (annualised), the fastest pace in nearly two years. But the surge was largely due to consumers’ summer spending sprees and a jump in inventory investments, which likely aren’t sustainable.

“A still-strong labour market and persistent above-target inflation have largely accounted for the Fed’s hawkish tone. However, since raising short-term interest rates to a range of 5.25 per cent–5.5 per cent in July, policymakers have adopted a wait-and-see approach to additional increases. The compounding effects of higher rates and consumer prices ultimately will stifle the labour market and the economy, flipping the Fed.

“While the Fed left its future policy options open, the central bank’s tightening campaign is likely over. With Treasury yields soaring recently to 16-year highs, the bond market is doing its part, alongside the Fed, to tighten financial conditions. The yield on the ten-year Treasury note, a benchmark for mortgage and other consumer lending rates, recently topped five per cent for the first time since 2007.

“The labour market is a main factor guiding the Fed’s holding pattern. Resilient job creation and the relatively low unemployment rate continue to fuel inflation worries and complicate its interest rate outlook.

“Mounting conflicts between management and labour underscore an unfolding structural economic shift over the coming years. Growing demands for higher wages across industries will likely reshape the capital/ labour relationship to favour labour over capital.

“This pending dynamic also supports our long-term inflation view. With labour taking precedence, inflation likely will settle higher than the Fed’s current two per cent target. We expect this trend to emerge over the next three to five years and persist from there.”

By Charles Tan, co-chief investment officer – global fixed income

The post US Fed tightening campaign ‘likely over’ appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2023/11/us-fed-tightening-campaign-likely-over/feed/ 0