Written by Peter Baden, CFA, Chief Investment Officer
Headlines of the Week
Some Fed meetings are more important than others. The Fed meets next week and it promises to be an interesting meeting. With inflation readings the highest in decades, a confirmed chair, empty seats filled (or soon to be), and the political support in place, the Fed has signaled they are ready to act. It’s not expected that the Fed will start lifting the target Fed Funds Rate at this meeting (That would certainly take it up the interesting scale) but expect an update on the removal of extraordinary support measures and normalization of rates.
A quick guide: The Fed has three main tools to manage interest rates and the money supply (And by extension inflation, jobs and the economy). The overnight Fed Funds Rate (Now 0-0.25%), a bond purchase program and management of their $8.86 trillion balance sheet. The Chairman and other Governors have all signaled rate increases starting this year. In the last meeting they decreased the bond buying program (Tapered), moving the end of new purchases from June to March. Released in the minutes and not foreshadowed, the Governors are discussing shrinking the Fed balance sheet.
So what to expect:
- Markets, Economists forecast 3-4 Fed Funds rate increases, moving the Fed Fund rate from a range of 0.00-0.25% to 0.75%-1.00% by year end. Expect 25 basis point (0.25%) increases at each meeting. Some economists foresee five increases, some economists are calling for a 50 bps increase in March.
- The bond buying program will end in March.
- Shrinking the balance sheet is new and “Shrinking” is the term The Chairman used, not runoff. Most economists believe the Fed will let maturities runoff and not replace the bonds in the portfolio. However, the Governors are still discussing the balance sheet so this will be a key point to watch for on Wednesday when the Fed makes their announcement.
As we mentioned last week, inflation is here, and the Fed has activated. This will be the first time since the 1980’s the Fed is chasing inflation rather than anticipating inflation. Strong, determined language backed by resolute action will reinforce confidence in the Fed and perhaps slow down the rate of inflation later this year.
Indexes used for AAA Municipal Yields
2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)
5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)
10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI)
30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)
Indexes used for US Treasury Yields
2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)
5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)
10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)
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