By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We’ve had a very exciting week in the US capital markets as a number of Fed officials, including Fed Chair Powell, had the opportunity to update us on the current inflationary environment and the outlook for US interest rates. US interest rates and equities have been bouncing around with each utterance. However, many market participants interpreted Powell’s comments that the Fed has accomplished its objective, as recent “core” inflation has moderated. But did he really close the door on a future further increase in rates?

Here’s what Powell shared, “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy”. In my opinion, the door remains open and more than ajar. What does above-trend growth mean? Does the current forecast by the Atlanta Fed’s GDPNow model of 5.4% annualized real growth for Q3’23 warrant the label of above growth? It certainly seems so to me.

Furthermore, the job market continues to surprise. Near historic low unemployment levels persist and initial jobless claims seem to come in below forecast each and every week. The most recent data release revealed the lowest level (198K) in more than nine months. As we’ve mentioned in numerous blog posts, oil may prove to be the fly in the chardonnay, as the price of WTI has crept above $90/barrel once more. Oil and its byproducts are in more than 6,000 products.

Despite these facts, US Treasury bonds across the yield curve have rallied this morning, bringing the yields for 3- to 10-year Treasury Note maturities below or further away from the 5% level, while equities are once again down anywhere from 0.5% (DJIA) to 1.5% (NASDAQ). Clearly, there remains great uncertainty as to how the US economy will react to the Fed’s aggressive tightening first enacted in March 2022. Given this uncertainty, plan sponsors and their advisors should seek greater certainty through an investment in cash flow matching, which carefully matches asset cash flows to benefits and expenses. The elevated US interest rates are providing plan sponsors with a wonderful opportunity to significantly reduce risk while not sacrificing return, although managing a pension is truly not a return game.