As was widely expected, the Fed kept the Fed Funds Rate target unchanged at the September FOMC meeting. As a result, the trading range remains at 5.25%–5.50%. While the policy makers continue to keep their options open for another potential rate hike before year-end, as I’ve said many times before, we are either at, or very close to, the end of this rate hike cycle.
When you look at the U.S. economy’s resiliency thus far in 2023, given 525 basis points (bps) worth of rate hikes, it begs the question: is that all you got? That is precisely what Powell & Co will be contemplating as we move into the fourth quarter and head toward 2024. Against this backdrop, the Fed’s new mantra is to look at the totality of upcoming economic data releases to determine if their job is done.
While the money and bond markets await this data, it is important to remember that even if there are no new additional rate hikes forthcoming, the Fed appears to be united in its stance that rates need to remain in this restrictive territory for the foreseeable future. Hence, the “higher for longer” theme I’ve been consistently emphasizing.
On that front, the expectation for rate cuts has been completely turned on its head. As recently as the day after the May FOMC meeting, the implied probability for Fed Funds Futures already had the Fed cutting rates by now. Instead, we got one more rate hike and the markets are still not completely ruling out another increase at the November FOMC gathering. In addition, four months ago, Fed Funds Futures were looking for the target rate to be under the 4% threshold by January of next year. As of this writing, the implied probability still has Fed Funds over 4.50% by the end of 2024! Along the same lines, while the Fed’s dot plot garners a great deal of attention as well, as with Fed Funds Futures, investors have witnessed how unreliable these two forecasting tools can be.
Whether or not another rate hike is in the cards, quantitative tightening (QT) continues unabated. The Fed continues on its mission to reduce its holdings of Treasuries and mortgage-backed securities (MBS) on its balance sheet. Although this means of tightening policy has essentially gone under the radar (much like the Fed had hoped), it is a part of the policy makers’ toolkit that should not be ignored.
The Bottom Line
Regardless of whether the Fed is now officially done or not from a rate hike perspective, the end result of this cycle will be that interest rates are now at levels a generation of investors have not witnessed before. In addition, the higher for longer theme creates a whole new dynamic to consider in your fixed income portfolio decision-making process.
—
Originally Posted September 20, 2023 – Fed Watch: Is That All You Got?
Disclosure: WisdomTree U.S.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this and other important information, please call 866.909.WISE (9473) or click here to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing, including the possible loss of principal. Past performance does not guarantee future results.
You cannot invest directly in an index.
Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please see prospectus for discussion of risks.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.
Interactive Advisors offers two portfolios powered by WisdomTree: the WisdomTree Aggressive and WisdomTree Moderately Aggressive with Alts portfolios.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from WisdomTree U.S. and is being posted with its permission. The views expressed in this material are solely those of the author and/or WisdomTree U.S. and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Alternative Investments
Alternative investments can be highly illiquid, are speculative and may not be suitable for all investors. Investing in Alternative investments is only intended for experienced and sophisticated investors who have a high risk tolerance. Investors should carefully review and consider potential risks before investing. Significant risks may include but are not limited to the loss of all or a portion of an investment due to leverage; lack of liquidity; volatility of returns; restrictions on transferring of interests in a fund; lower diversification; complex tax structures; reduced regulation and higher fees.
Join The Conversation
If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.