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

There are always competing views within the investment community. That’s what makes markets! However, there seems to be more unanimity these days surrounding the view that the Fed has accomplished its objective and rates, as a result, will have to fall. But is that really what is going to happen, at least in the near-term?

The economy: I can’t tell you how many times per day I read something that highlights the slowing economy. But is it slowing? GDP for 2023’s third (4.9%) and fourth (3.3%) quarters highlight strong growth. Furthermore, the Atlanta Fed’s GDPNow model is currently showing a 4.2% annual GDP growth for the first quarter of 2024. Again, are those numbers indicative of a weakening economy?

Labor Force: The US just enjoyed a blowout jobs number for January, while November and December payrolls were revised up by 133,000. Wage growth remains above 4%. Job openings, which had been declining, have risen to >900K. The labor participation rate had been climbing but fell by 0.3% to 62.5% in December and remained there for January. A smaller workforce may make it difficult for business to hire without increasing wages.

Inflation: What appeared to be a one-way path for inflation since peaking at roughly 9%, may have taken a turn in January. Only time will tell if this is a new path or just a wiggle on the road to 2%, but it is disconcerting none-the-less. I’m specifically speaking about the 7.3 jump in the ISM’s services sector price index for January. That increase was the greatest jump since August 2012. The service sector makes up about 80% of the US economy. Oh, no!

Other factors: The 3 inputs referenced above would be more than enough to have investors pause the celebrations that the Fed is finished. However, there are many other considerations that need to be factored into the equation, including 2 wars, pirates in the Red Sea disrupting commerce, de-globalization, which imports inflation back into the US, and the US Presidential election.

Taken in totality, where’s the case for US interest rates to fall? Ryan ALM, Inc. doesn’t have a crystal ball that is any clearer than anyone else’s. As a result, we don’t forecast the direction of rates. What we do is provide an investment strategy that brings certainty to the management of pensions that constantly live with great uncertainty. Given the elevated level of rates (not high, but average), plan sponsors should take the opportunity to match bond cash flows of principal and interest with the plan’s liability cash flows. You’ll SECURE the pension promises while mitigating the great unknown of interest risk. What a win, win!