Rates Rise Again
Better safe than sorry? Apparently, that’s the position of the Federal Reserve as they seek to rein in inflation. While the economy has been slowing and economic indicators point to a drop-in economic activity, the Fed has increased interest rates by another 25 basis points. While a surprise to some, we believe this is the end (or near end) of the interest rate tightening cycle.
We expect the bond market to start pricing higher in a chance of recession. It is conceivable that interest rates will start to come down in the fourth quarter of this year. This could very well result in capital appreciation for fixed income assets. Remember that as interest rates fall, bond values go up.
DWM durations remain lower than the overall aggregate index, which has proven to be a prudent move as the Federal Reserve ramped up rates. We will be looking at our duration positioning now that additional interest rate increases are not likely given current data.
A recent article from Reuters outlined the Federal Reserve’s action this week. An excerpt is provided below:
“The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday and Fed Chair Jerome Powell said the economy still needed to slow and the labor market to weaken for inflation to "credibly" return to the U.S. central bank's 2% target.
The hike, the Fed's 11th in its last 12 meetings, set the benchmark overnight interest rate in the 5.25%-5.50% range, a level last seen just prior to the 2007 housing market crash and which has not been consistently exceeded for about 22 years.
"The (Federal Open Market) Committee will continue to assess additional information and its implications for monetary policy," the Fed said in language that was little changed from its June 14 statement and which left the central bank's policy options open as it searches for a stopping point to the current tightening cycle.
Powell made no promises either way, with a September meeting eight weeks from now considered "live" for another rate increase, though a continued slowing of inflation and weaker economic data may also prompt policymakers to pause additional interest rate hikes.”