Presented by The PensionmarkMeridien Team, September 26, 2022
The recent Federal Reserve rate hike was, ultimately, guaranteed. It was just a matter of how big the September 21st hike would be, and the Fed did not disappoint yield-hungry investors–raising the key overnight rate by 0.75%. This was in line with most expectations and brings benchmark interest rates to 3% – 3.25%.1
U.S. stock indexes reacted in a volatile fashion, initially surging to the upside off the news and reverting to the downside2 after the conclusion of Federal Reserve Chair Jerome Powell’s press conference.
The Data
The rate hike itself does not have all of the puzzle pieces. The data matters as well.
Fresh off the presses, the Summary of Economic Projections3 shows us the latest outlook from the Federal Reserve Board and Federal Reserve Bank presidents:
- Median personal consumption expenditures (PCE) data, the Fed’s favorite gauge of consumer inflation, was revised higher for the remainder of this year and into 2023.
- The median projected unemployment rate was revised higher for 2022, 2023, and 2024.
- The median projected real gross domestic product (GDP) growth was revised lower for 2022, 2023, and 2024.
Also noteworthy: In its most recent statement, the Fed made no mention of any “pivot” (to cut rates), nor was there a mention of any pause in rate hikes.
Overall, the Fed’s most recent forecasts pointed to slower growth, higher inflation, and higher unemployment than was previously expressed.
Intensity, Speed, 4.6%?
Market participants wanted clues on the future of Fed policy at the most recent meeting, seemingly now more than ever.
Ahead of the conference, there had been chatter of a 4.6% level in 2023 as the Fed’s target to quell inflation. (Currently, it’s 3% – 3.25%). We received confirmation on September 21 about this target level via the Fed’s median projections4, which showed that 4.6% is indeed the Fed’s current interest rate target5 for 2023.
Given that the current rates are 3% – 3.25%, one could assess that more hikes are in the cards, potentially in the form of another 75 basis points in November and 50 basis points in December.
Short-Term Treasuries
As the Fed’s overnight lending rate increases and market sentiment shifts towards further rate hikes, tendencies have been for short-term yields to rise. 2-year note yields are currently at their highest levels since 2007 6, and 10-year Treasury yields have been higher, too.
The yield curve remains inverted, with the 2-year yield 7 higher than the 10-year government bond yield.
Exposure to Short-Term Yields
Products tied to the short end of the yield curve can create potential opportunities for investors wanting exposure to the current rates while seeking near-term liquidity.
Short-term treasuries can be viable and potentially superior alternatives to checking account yields 8, depending on your liquidity needs.
Questions about interest rate products as a place to park cash? Feel free to contact us!
Investing Environment
There is no one-size-fits-all strategy for investors. Varying investment objectives, liquidity needs, risk tolerances, timeframes, and more all factor into an investor’s strategy. However, should inflation persist amid rising interest rates, exposure 9 to such rising rates can be a valuable component of nearly all investors’ portfolios and strategies.
That said, as a long-term investor, you shouldn’t worry about every Fed meeting or month of trade. Time 10 handles most required duties for long-term investors. It is, however, a good idea to understand what’s going on with the economy, which is why we are sharing this analysis with you.
If you have any questions or financial needs as fall begins in earnest, feel free to reach out to us. We are always here if you need us!
Citations.
1 – Los Angeles Times, September 21, 2022
2 – CNBC, September 21, 2022
3 – Federal Reserve, September 21, 2022
4 – Federal Reserve, September 21, 2022
5 – CNBC, September 21, 2022
6 – CNBC, September 21, 2022
7 – Trading View, September 21, 2022
8 – ValuePenguin (by Lending Tree), September 7, 2022
9 – Investopedia, January 14, 2022
10 – University of California, 2022
Pensionmark® Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark® is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).
