Further Interest Rate Hikes On The Menu

In comments on the market, Daniel Berkowitz, investment director for investment manager Prudent Management Associates wrote:

Interest Rate Hikes Expected

Jay Powell delivered another set of remarks at the Economic Club of Washington this week, pushing back on the idea that looser monetary policy is coming soon. While his comments weren’t as forceful as they could have been in addressing the market’s expectation for interest rate cuts in 2023, he did note that further rate increases were likely at hand, but also that the Fed would follow the data.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2022 hedge fund letters, conferences and more

Assuming the Fed truly will follow through with an extended pause after reaching its desired terminal rate, there’s little risk to them broadcasting more hawkish sentiment at this point in the cycle. This is particularly true given the rally in financial assets to kick off 2023.

The Chairman seems tired of trying to convince the market that the Fed is right this time. To be sure, the Fed’s job of forecasting inflation is always difficult, and in our current environment, it’s even more challenging.

With that said, some skepticism about their intentions is warranted, though some investors are starting to seem convinced. The more rate-sensitive two-year Treasury yield has jumped 35 basis points since the start of February, and federal funds futures are starting to price in a terminal rate just above 5%.

The President’s State of the Union address was notable for investors on several fronts of course, but most notable was further posturing related to the debt ceiling. Regrettably, the upcoming debt ceiling confrontation is not likely to be resolved behind closed doors, but rather is destined for a full public spectacle. Speaker McCarthy has already stated that a clean debt ceiling increase is off the table.

It’s been some time since 2011 when extreme political brinkmanship led Standard & Poor’s to downgrade US debt from its triple-A rating, but it’s not impossible for history to repeat itself. Certainly, our base case expectation is that politicians ultimately reach a compromise given the widely understood importance of Treasury bonds to the global financial system.

The President also used the spotlight to take aim at billionaires and propose a large increase to the recently enacted 1% tax on stock buybacks. Given the current power-sharing arrangement in Congress, these ideas almost certainly won’t become reality. With that said, we do believe that tax policy will resurface in upcoming debt ceiling negotiations in some form and bears watching moving forward.

About Prudent Management Associates

Prudent’s core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.

inflation
monetary
policy
fed
monetary policy