By: Russ Kamp, Managing Director, Ryan ALM, Inc.
With great anticipation, the Federal Reserve’s notes from the November 2nd meeting were released at 2 pm EST. Immediately, both equity and bond markets rallied. I was sure that there must have been language in the notes that indicated that the Fed had come to the conclusion that they had accomplished the objective of containing inflation and that the “great pivot” was about to begin as inflation neared their 2% target. But no! What they said, was “a number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate.” But that doesn’t mean stopping the increases. It also doesn’t mean that the Fed believes that it has accomplished its goal. In fact, FOMC members said inflation was “unacceptably high” and “well above” the committee’s longer-run 2% target, the minutes showed.
Why the rally? How does this change anything that was already anticipated? Whether the increase is 50 bps or 75 bps, the Fed will continue to raise rates. Despite the majority opinion that a tempered pace may be more acceptable, “A few other participants noted that, before slowing the pace of policy rate increases, it could be advantageous to wait until the stance of policy was more clearly in restrictive territory and there were more concrete signs that inflation pressures were receding significantly,” What can the Fed point to at this time that clearly demonstrates that the tightening to date has worked? Sure, mortgage applications have fallen, but new home sales exceeded expectations by 62K in today’s release. The labor market is still strong, despite a slight increase in the initial unemployment claims data that was also released today (up +15,000 over expectations).
“With inflation remaining stubbornly high, the staff continued to view the risks to the inflation projection as skewed to the upside,” according to the minutes. With so much uncertainty, shouldn’t plan sponsors of DB plans seek alternatives to asset allocation strategies singularly focused on the ROA? Why not devise a strategy that improves liquidity in the short-term, while extending the investment horizon for those alpha assets that need time to achieve their long-term potential? Doing the same old, same old has never been a winning strategy. Given so much uncertainty in today’s investing climate, it is doomed before it begins.