- Fixed Income Portfolio Manager
United States, Institutional
ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
The US Federal Reserve (Fed) maintained its target interest rate at a range of 5.25% – 5.50% during its September 2023 policy meeting, as widely expected by most market participants. In the post-meeting press conference, Chair Jerome Powell communicated the Fed’s bias that additional policy firming may still be necessary to lower inflation to its 2% target.
In its updated Summary of Economic Projections (SEP) most Federal Open Market Committee (FOMC) participants projected an additional hike this year, while reducing their forecasts for the number of rate cuts in 2024. Market participants likely interpreted this as a bit hawkish relative to consensus, based on the sell-off in US Treasury yields across the curve, but particularly at the front end.
Inflation likely to exceed FOMC forecasts
In my view, the Fed conveyed a high degree of confidence in a soft landing for the US economy based on its updated economic projections despite Powell suggesting during the press conference that it was not his base case. While tighter financial conditions are beginning to have their desired effect on lowering inflation, I still suspect it will exceed the Fed’s optimistic expectations into next year. US headline inflation, as measured by the Consumer Price Index (CPI), increased to 3.7% year over year in August 2023 — driven by surging energy prices — while the core inflation rate slowed to 4.3%. The Fed’s preferred measure, Personal Consumption Expenditures (PCE) price index core, ticked up to 4.2% year over year in July, and is projected to decline to 3.7% and 2.6% by the end of 2023 and 2024, respectively.
The Fed focuses on core inflation that strips out more volatile food and energy prices. However, the recent surge in oil prices (+35% since late June) may force another hike if these elevated levels prove durable and lead to more broad-based price pressures as businesses pass on costs to consumers or if they lead to inflation expectations beginning to move higher again.
Government shutdown could complicate future policy decisions
I believe there is a high likelihood of another government shutdown beginning on October 1. It is important to distinguish government shutdowns (failure by Congress to reach an agreement on spending) from the debt ceiling (US statutory borrowing limit) fiascos. Each of these events has become commonplace due to increased polarization in Washington, but shutdowns generally do not result in lasting adverse impacts on growth, since wages/spending eventually “catch up.” However, because government employees are tasked with compiling economic data, there is a risk that key releases on inflation and employment will be unavailable to the Fed at its November and/or December meetings, depending on how long the shutdown persists. The United Auto Workers strike, which commenced on September 15, if protracted, could further cloud the Fed’s forecasts.
Final thoughts for Fed watchers
The market is currently pricing in roughly 50% odds of one more interest-rate hike this year, followed by cuts beginning in the second quarter of 2024. As of this writing, I believe the Fed has likely already reached its terminal policy rate and may prefer to begin rate cuts in in the first quarter of 2024 as economic data begins to roll over and before the presidential election cycle is in full swing. While I still expect that inflation will remain above the Fed’s 2% target by that time, prolonged higher inflation will have further translated into declining real wages for consumers at a time when their precautionary savings are likely to be depleted. Moreover, this will be occurring against a backdrop of rising unemployment and tight credit conditions. I therefore think the Fed should and will demonstrate a tolerance for above-target inflation since failing to do so risks tipping the economy into a more severe recession.
Expert
Related insights
Showing
of
Insights Posts
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
The revenge of the monetarists
Continue readingBy
event
5
min
Article
2025-06-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Governments have been slow to reduce their fiscal deficits — it could cost them
Continue reading
event
4
min
Article
2025-06-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
The Fed’s lessons learned from its COVID response
Continue readingBy
event
6
min
Article
2025-04-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Biden 2.0: National security and investment themes
Continue readingBy
event
5
min
Article
2025-04-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
FOMC: Stable policy amid market volatility
Continue reading
event
Quick Take
2025-03-31
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
highlight_off
You've been subscribed
Thank you for subscribing. You can manage your subscription using the links provided in any of our subscription emails.
Read next
Showing
of
Insights Posts
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
The revenge of the monetarists
Fixed Income Portfolio Manager Brij Khurana makes the case for a monetarist explanation for moderating inflation.
By
event
5
min
Article
2025-06-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Interest rates
Monetary policy
Outlook
Economic cycle
Fiscal policy
Macro
USA
Japan
Europe
France
Germany
Italy
United Kingdom
Fixed income
Macro hedge funds
Credit
Government bonds
Investment grade
Article
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Governments have been slow to reduce their fiscal deficits — it could cost them
Our expert explores the investment implications of continued excessive deficit spending by G7 countries.
event
4
min
Article
2025-06-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Economic cycle
Interest rates
Monetary policy
Fixed income program
Inflation
Fiscal policy
USA
Credit
Article
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
The Fed’s lessons learned from its COVID response
Fixed Income Portfolio Manager Brij Khurana breaks down the central bank's policy decisions during the pandemic and explains how they continue to affect financial markets.
By
event
6
min
Article
2025-04-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Biden 2.0: National security and investment themes
The geopolitical and investment implications of a potential second Biden term.
By
event
5
min
Article
2025-04-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Fiscal policy
Volatility
Monetary policy
Fixed income program
Inflation
Interest rates
Americas
Fixed income
Credit
Government bonds
High yield
Investment grade
Quick Take
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
FOMC: Stable policy amid market volatility
The Fed is holding steady amid market turmoil. See our quick notes on the FOMC's March policy statement, forecasts, and the Fed chair's press conference.
event
Quick Take
2025-03-31
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
The Trump/Biden rematch: Market implications of unprecedented policy divergence
Macro Strategist Juhi Dhawan discusses six key areas of policy debate in this year's US election that she expects will matter most to markets, from the tax and spending plans to trade and geopolitics.
event
Article
2025-03-31
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Economic cycle
Interest rates
Monetary policy
Fixed income program
Inflation
Fiscal policy
USA
Credit
Article
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Is the US economy really that different since COVID?
US economists have been touting the resilience of the post-COVID economic rebound. Brij Khurana dissects several key economic indicators to see what's really changed since 2019.
By
event
Article
2025-03-31
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Multi-Sector Credit
Fixed income
Macro
Global Credit Plus
Credit
Total return
Fiscal policy
Government bonds
Investment grade
Fixed income program
Americas
Article
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Too much focus on Fed, not enough on fiscal
Current US fiscal and monetary policy stances argue for risk taking in fixed income.
event
Article
2025-02-07
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Why structural change in Germany may impact investors globally
Macro Strategists John Butler and Eoin O’Callaghan discuss why they believe the structural changes currently underway in Germany will impact investors globally.
event
Article
2025-01-31
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
The US economy in 2024: A tale of transition
Our US macro expert sees changes in consumer and investment spending in the coming year, and highlights what she'll be watching for in terms of policy, politics, and profit margins.
event
Article
2024-06-30
Archived
info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
URL References
Related Insights
contact us
legal Information
© Copyright 2024 Wellington Management Company LLP. All rights reserved. WELLINGTON MANAGEMENT ® is a registered service mark of Wellington Group Holdings LLP. For institutional or professional investors only.
The “cleanest dirty shirt” now has too many stains
Fixed Income Portfolio Manager posits that US fiscal profligacy will change the game for asset allocators.
By
Brij Khurana