Inflation, rates and the road ahead

WEBVTT

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So, I mentioned the meeting in Jackson Hole last week, we

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heard from Fed Chair Kevin Warsh, so tell us what were your

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key takeaways from that big meeting last week?

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So it was interesting his statements around what part of that dual

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mandate that they're focusing on.

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And they've mentioned that they are squarely focused on the inflation side of

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the ledger there. Which is interesting because for me, the employment

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side is also another lever they can always pull on, whether it's making an

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argument to raise rates or making an argument to keep rates steady.

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So as we know, we got recent revision to some NFP

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numbers, non-farm payroll numbers. You know, employment is kind of, it's okay.

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You know, we're not seeing a lot of. You know, layoffs happening, but you know

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you could say that the kind of the the labour market is hanging in there but

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we're certainly not seeing you know massive drop growth across the board.

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He made reference to core components within the PCE also

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continuing to trend higher.

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So the Fed is squarely looking at as we know there are many voting members on

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the Fed. You know there a lot of Fed members who are tilting more

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hawkish thinking that you know monetary policy is a little bit easy right now

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we need more restrictive conditions given.

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Where inflation is right now. There are some folks in the Fed though, some

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voting members who still think monetary policy is appropriate at current

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levels.

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So yeah, the big takeaway for me is they're squarely focused on that inflation

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side. That inflation side remains to run hot.

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To me that says there is some possibility we can see higher rates going

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into year end.

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Yeah, so let's talk a little bit more about the implications for monetary

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policy and what that means for investors and how they should be thinking about

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that in the context of their portfolio.

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Yeah, certainly. So obviously, coming into this year, the market was pricing

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in some probability of rate hikes sometime within this year.

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You know, kind of dancing around the one rate hike sometime

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this year that certainly that market expectation has ticked

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up. So we are ticking up to kind of more of a 50-50

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probability for the September.

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They are hiking in more than 100% probability of a hike going into year

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end. So back up to before.

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Jackson Hole, that was less than, the market was pricing less than 100%

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probability. Again, the marketplace can be wrong, this is just kind of what the

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market is expecting right now.

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How that ties back to our clients and their investments in their portfolio,

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this certainly applies to the fixed income side of the portfolio.

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Now, if we take a look at the yield curve and where it was

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before the meeting and it was after the meeting.

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You know, we saw the curve bear flattened a bit.

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So set another way, we saw short term interest rates move a little bit higher

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than longer term interest rate.

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But on the whole, we've seen that kind of yield curve shift a little higher.

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So a couple of things at play there. Number one, on the short end, you know

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market's expecting potential for a rate hike.

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So that's kind of takes care of the short and the curve.

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The long end of the curve, you know Kevin Warsh did make reference

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to the economy still being resilient, still being driven by a lot of that AI

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capex. So the long end of the curve is typically driven by

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inflation expectations and growth expectations.

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So growth is still hanging in there. Inflation is still trending a little

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higher. So that kind of explains what we're seeing on the curve there.

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Now in terms of our investors and what you can look, I think what we can

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expect right now is rates volatility.

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So there is, like I mentioned, there's some folks at the Fed who think monetary

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policy needs to be more restrictive, some folks who think we're kind of good

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where we are. All that I can expect from that, what I would expect from that is

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volatility on the rate curve. So you really got to take a look at kind of your

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duration risk. So, you know, there might be a preference there to look closer

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to the shorter end of the curve, look at kind reducing down some of that

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duration risk in your portfolio in response to what, you know,

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what I expect to be kind of a volatile time for rates.