FOMC Preview: Watch the Dots

The Federal Reserve is widely expected to raise interest rates this week after a robust November jobs report brought into focus the improving economic picture in the U.S. The economy added 211,000 new jobs last month, and the Labor Department also revised the September and October prints higher by a total of 26,000 jobs. The market has largely priced in a rate increase in December, with the two-year Treasury note hovering around 0.90%, up 25 bps from the beginning of the year. As such, the pace of rate increases, rather than the timing of initial liftoff, has become measurably more important for fixed income investors. We’ll get a glimpse into the Fed’s expected pace of subsequent rate hikes with the release of the now famous “dot plot,” which illustrates each FOMC member’s expectations for future rate increases. Given that wage inflation has been tepid and core inflation, as measured by the Personal Consumption Expenditure Index, remains below the Federal Reserve’s 2% target, we expect the pace of monetary policy tightening to be gradual in nature. In addition, barring any surprise upside in economic and inflation data, we expect longer-term interest rates to remain range bound in the near to medium term. Ultimately, higher interest rates are good news for fixed income investors. As bonds mature and the proceeds are reinvested at higher yields, the income generated in client portfolios will increase. Our short and intermediate portfolios have a significant number of holdings that mature in the next three years, which will enable us to reinvest at higher yields should we see interest rates rise. 

Source: Bloomberg