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What is PCM doing with Fixed Income?
With Markets driven by Inflation, recent client conversations have revolved around the fixed-income portion of their investment portfolios.
November 18, 2022
Over the past few months, we have discussed how the markets have been driven by news of inflation and interest rates. Many of our recent conversations with clients have revolved around these topics and specifically the fixed-income portion of their investment portfolios.
All Eyes on the Federal Reserve
Find out what's happening in Essex-Chester-Deep Riverfor free with the latest updates from Patch.
Many commentators on the financial news outlets have talked about a “Fed Pivot” for several months now. This so-called “pivot” would involve the Federal Reserve, after having raised interest rates to then change course and lower rates again with the hope of preventing a larger economic slowdown than is necessary to control inflation.
However, when we look at what the Federal Reserve members are actually saying, a pivot in interest rates looks unlikely. Consensus thinking is that any change that does come (the start of the “pivot”) would be recognized when interest rates rise by.25% or .5% compared to the unprecedented .75% increase we have seen for several months now. Federal Reserve officials have consistently stressed that interest rates must level off for a period before any decreases occur. All of these officials have emphasized that they see inflation as a greater long-term risk to the US economy than a possible recession.
Find out what's happening in Essex-Chester-Deep Riverfor free with the latest updates from Patch.
What Are Normal Interest Rates?
The chart below shows the Federal Funds Rates from 1955 – 2022. Over this period, rates have been as low as 0% and as high as 22%. Over the 36-year period from 1965 to 2001, the interest rate rarely fell below 5%. When looking at this chart, interest rates at or near 0% as we have seen since 2009 are not historically normal, just as rates like those seen in the 1970s and 1980s at or above 10% are not historically normal either. Over the past 77 years, a reasonable case could be made showing that historically the normal range of interest rates falls in the 3% to 6% range.
Many economists expect the Federal Reserve to pause raising rates in 2023 when they reach a range of 5% to 5.5%.
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