IEI - Is The Fed Done Hiking Interest Rates?
2023-09-19 23:20:00 ET
Summary
- Where we are in the inflation fight.
- Why the U.S. jobs market is still a concern for the Fed.
- The Fed could very well hike again, but not yet.
The U.S. Federal Reserve meets this week as markets again focus on interest rates and the state of inflation. Mike MacBain, CEO and CIO of East Coast Fund Management, discusses the Fed’s potential strategy moving forward and the implications for fixed income.
Transcript
Greg Bonnell: Borrowing costs are front and center this week for investors. Of course, we've got the US Federal Reserve on deck to deliver yet another interest-rate decision. We also have rising gasoline prices pushing headline inflation higher.
So, what might we expect from the inflation-fighting central bank? Joining us now to discuss, Mike McBain, CEO and CIO of East Coast Fund Management. Welcome to the show. It's your first time on, Mike.
Mike MacBain: It's an absolute pleasure to be here, Greg.
Greg Bonnell: So let's talk about the big issue. For a year and a half now, investors have been focused on inflation. They've been focused on interest-rate policy. And we are seeing headlines start to tick a bit higher. You roll it all together, what do you think we're going to get from the Fed this week?
Mike MacBain: I think the Fed is a nothing this week. They've been pretty clear about their goals for lower inflation and higher unemployment. And the data that's come in has suggested that inflation is coming down a little bit and they probably have time to wait. And I think that - I'm not convinced they're finished. But I think for this month, there hasn't been enough data to convince them that they should be putting rates up.
Greg Bonnell: When we talked about, obviously, headline inflation - that's not what the central bank's focused on. Here at home or south of the border, they take a look at core. They want to strip it, the more volatile measures, because gasoline has been volatile. Oil prices have been volatile. Is that the sort of thing where, after all of the activity they had on interest rates, they might be able to look through some of these bumps?
Mike MacBain: Yeah. I think that what we've also seen on the inflation front is it's come down pretty significantly, as I think most people expected. But it's starting to kind of flatten out. And last month, CPI numbers were a little bit stronger in the core segments that they're focused on. And so I think they haven't seen enough information really to push rates higher at this meeting, in my opinion.
Greg Bonnell: So you think hold for this week. But you say you can't rule out before the end of the year another rate hike. What would take them there? If they're going to look through things like volatile gas prices and other volatile components, what would actually make them think the job isn't done yet?
Mike MacBain: Well, I think the two key factors are unemployment and inflation for them. And Jay Powell has been pretty direct about that. I think he believes very strongly that the economy won't slow down enough unless he starts to see some movement on employment.
And so, like I said, inflation numbers have come down. They've flattened a little bit here most recently. If we see continued strong employment and inflation doesn't continue to fall, then I think next month, that meeting's alive, in my opinion.
Greg Bonnell: Is this making sense? I mean, overall, when we step back and we think of how aggressive - I mean, maybe aggressive's too strong a word. But I think it sort of fits that the Bank of Canada has been - western central banks in general in raising the cost of borrowing to try to tame inflation.
And they warned us at the outset there's going to be a lot of pain. There's going to be a lot of job loss, a lot of this and that. And there's been a resilience. Can we square these things?
Mike MacBain: Yeah, there definitely has been resilience in the job market for sure. In terms of the job openings data, that peaked around 12 million jobs. And that's dropped meaningfully. And I think that Fed Chair Powell did talk about that 10 to 12 months ago, that they wanted to take or create some slack in those job openings.
And that's kind of your Goldilocks scenario because those are jobs that are actually out there. Them going away doesn't take a job away from any individual. So that's fantastic. But you're still seeing 150,000-250,000 new jobs every month. That's too much in his opinion, I think. And so that, at the end of the day, I think is going to be - unless you see a meaningful falloff in inflation - that's going to be what drives him to put rates higher.
Greg Bonnell: Now, the other part of this equation, too, where they've talked about, we're taking these aggressive moves on borrowing costs or trying to tame inflation. We may not be done yet. But when they eventually are done, then they have the further line that, "And we're going to stay here for a while."
I feel like at certain points this year, the bond market has believed them. And then the bond market has decided not to fully believe what they're being told. Where we are right now? Where does the bond market actually think the Fed is going?
Mike MacBain: Well, if you remember two or three years ago, they were keeping rates low for, seemed like forever. Their stated objective was we're not even thinking about thinking, about thinking about raising rates. And so I'm going to say nine months after that, they started raising rates at unprecedented speed.
So I think you need to take those comments with a bit of a grain of salt, because they have to say that because that's what their belief is today. But as we all know, the world changes quite quickly at times. And if they decide that rates need to come down because we've gone into a recession and employment numbers are falling off a cliff, then rates will go down.
I'm not anticipating that. I do believe that we're going to be in a period where nothing really meaningfully happens in the rate market. A slight rise in rates, in my opinion over time, is where we go.
And I do think that we're going to have relatively stagnant interest rates over the next 12 months. But just because they say it, has proven many times that that's just what they're saying today.
Greg Bonnell: That's what they're saying today. And the future could change. You had a very interesting discussion in the middle of the summer with one of our colleagues at TD Securities, Andres Rincon.
And I found it fascinating when you talked about the fact that in the traditional, maybe, 60/40 portfolio, people think they're diversified. But because the entire world is laser focused on interest rates and central bank action, you're not perhaps as diversified as you think you might be. Run me through that line of thinking.
Mike MacBain: Well, the diversified 60/40 portfolio has always been there because, usually speaking, when interest rates are going up, that's a strong market. Equities are doing well. So there's diversification there. And the opposite has also been true fairly consistently over a long period of time. When equities are having a hard time, interest rates are coming down. And so that diversification benefit from interest rates has been very helpful.
Since the central banks have been really in control of the economy, which has been for quite a long time now - really off and on for the last decade - they've been driving the equity market.
So when the central banks are dropping rates, that's been viewed as positive for the equity market. And the equity markets have been rallying. So dropping rates means bond prices are going up.
So bond prices going up, equity prices going up. And then we get to a point where interest rates are, basically, zero. Where can they go? They can only go up. And when they go up, that's bad for the equity market.
So we've had that very positive correlation in the equity market and the bond market. So if you own 60% bonds and 40% equities, and equities are going down and bonds are going down, there's no diversification there. And that's been a function - "interference" is maybe a strong word but because of central bank interference in the market.
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Is The Fed Done Hiking Interest Rates?