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Fed decision: “hawkish hold”

As expected, the Fed kept the current interest rate levels (5.25%-5.50%) unchanged. Investors are interpreting the decision as a “hawkish hold” because the Fed also lowered the number of interest rate cuts it expects next year.

The updated economic projections echo what the MAS Insights team has been talking up all this year – that interest rates are likely to be higher for longer.

Based on the Fed’s economic projections from June, it expected one more interest rate hike this year, and four cuts next year. Now, new projections from September show the Fed still expects one more hike this year (remaining meetings: November 1 and December 13), but only two cuts next year. The market reaction sent the yield on a 2-year U.S. government bond to its highest since 2006 and the 10-year yield to its highest since 2007 – check out the chart below.

The latest projections also show the Fed expects growth to slow while broad and core inflation slowly moderates, not reaching 2% until 2026. That looks an awful lot like a "soft landing" forecast. Our expectation is that the Fed is unsure about the path of inflation ahead, and therefore providing a "middle of the road" forecast to keep their options open. As inflation re-firms and financial conditions continue to tighten, we are still expecting bumps as the economy absorbs over 525 basis points of interest rates hikes.

Portfolio strategy – Is now the right time to add bonds?

The latest Fed meeting means that investors should get used to higher interest rates. This could weigh on economic growth and corporate earnings, leading to further declines in the stock market.

Yields on investment-grade bonds have also risen, adding downwards pressure on prices. It’s also worth noting that interest rate volatility is still elevated relative to pre-pandemic levels and the trend of interest rates could move them higher. In response, we see investors staying on the sidelines to try and time the Fed peak. At this phase in the Fed hiking cycle, we believe that timing the credit cycle is beside the point. Historical experience suggests that investing before a Fed pause is can actually add value to investor portfolios, whereas adding just after the pause can detract from returns.

Looking at the chart above…what happened in 2006?

The mid-to-late aughts was a weird period in market history: facing a global financial crisis, central banks experimented with zero-interest-rate policies, negative global rates, and quantitative easing for the first time ever for many banks. As investors know well, a secular bond rally began in 2006, just after the Fed finished hiking, and continued as unusual monetary policy was sustained. As a result, investing before the Fed paused that year didn’t lead to a drawdown in the position, only that the following 3-year return didn’t capture the whole rally. Assuming the bond investor who bought investment-grade bonds before the Fed paused in 2006 held the position as long as the investor who added bonds after the Fed pause, both investors would have seen the same return.


The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Index includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate pass-throughs), asset-backed securities and commercial mortgage-backed securities (agency and non-agency).

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security in particular.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

SMRU: 5969415