Interest Rate Trajectory
I thought you might find this latest commentary from CNBC interesting as it essentially since it aligns with what we've been saying for quite some time; the economy will likely soften, and we expect interest rates to trend lower.
While stagflation is a concern, that may be avoidable if tax cuts are implemented, which we expect to happen. In this environment dividends will matter and extending bond duration will likely make sense. If the Federal Reserve does cut rates, it'll be a net positive for the equity market.
See excerpts below. I think it's an excellent summary of how financial experts are considering what might happen over the course of the next 3 to 6 months.
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“Amid a decidedly stagflationary forecast, including higher inflation and unemployment and surging odds of recession, respondents to the May CNBC Fed Survey still believe the Federal Reserve will cut interest rates this year and next.
Asked how the Fed will respond to not only persistently higher prices from tariffs but also weakening growth and employment, 65% say the Fed will cut rates to address the economic weakness despite the inflation. That’s up from 44% in the March survey when the majority thought the Fed would hold in that scenario. Only 26% say the Fed will hold rates when faced with the stagflation dilemma and just 3% believe the Fed will hike rates.
The 31 respondents, who include fund managers, analysts and economists, see the fed funds rate declining to 3.71% by year-end and 3.36% by the end of 2026 for a near 100-basis point decline over the period from the current level of 4.33%.
The odds of recession in the next year rose to 53%, up from 22% in January for the biggest two-survey increase since 2022. That’s when the Fed was just beginning its sharp rate hikes to battle inflation. The consumer price index is seen ratcheting up from the current level of 2.4% to 3.2% by year-end, but declining next year back to 2.6%.
At the same time, the unemployment rate is expected to rise from 4.2% to 4.7% and hold at about that level in 2026.
Gross domestic product is forecast at just 0.8% on average for this year, down from last year’s 3.1% growth rate.”
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