Bond Traders and Fed Policy | Adviser Investments

Hike, Pause or Cut? Preparing for the Fed’s Next Move

The Federal Reserve held steady on interest rates at its June meeting, but Chair Jerome Powell sent a clear message that this rate-hike cycle may yet have legs.

Bond traders reacted by pricing in Fed policy moves that would raise rates this summer. However, even as Powell signaled that cuts may be years away, the market is betting on the central bank lowering the fed funds rate starting this fall, which you can see in the chart below.

Traders' expectations for Federal Reserve policy.

Note: Chart shows the midpoint of the 5.00%–5.25% current fed funds rate along with trader expectations for the fed funds rate following the June Federal Open Market Committee policy meeting as of 6/15/23 at 5 p.m. EDT. Sources: CME FedWatch Tool, Adviser.

The takeaway is that the timing of rate cuts is uncertain. Sustained inflation, economic growth and job market strength will all influence the Fed’s decision to hike, pause or even reverse course. Fortunately, time is a valuable asset in the wealth management process, and preparation is foundational to our approach.

What Happens When Rate Cuts Begin?

When the Fed does cut interest rates, it will impact many areas of your financial life from investment returns to the yield on your savings account.

Stocks and bonds. Falling interest rates are often a tailwind for bonds. When rates go lower, bond prices tend to rise. Some analysts believe the transition to rate cuts will help stock investors since inflation and aggressive Fed rate hikes were the catalyst for stock market volatility in 2022 (though, as we noted in our last update, volatility has eased in recent months).

Savings accounts. The humble savings account, money market and certificate of deposit have benefited from the Fed’s rate hikes over the last year-plus as their yields have risen from near zero to the 3% to 5% range. When rates begin to fall and cash becomes less attractive relative to the risk premium on stocks, we expect savings accounts will offer lower yields. Talk to your wealth advisor to make sure you’re getting the most out of your cash.

Be Prepared

We don’t know exactly when rate cuts will be back in the conversation. Time will tell. But we’ll be following the Fed’s policy decisions closely on our clients’ behalf, and we’ll be prepared for a range of outcomes.

If you are a client, please reach out and we’d be more than happy to discuss further.

If you are not a client, click here to book a meeting with one of our expert financial advisors now!

This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2023 Adviser Investments, LLC. All Rights Reserved.