“Are We There Yet?” Positioning Bond Portfolios for Peak Rates

“It's difficult to make predictions, especially about the future.”

This quote has been attributed to everyone from quantum physicist and Nobel laureate Niels Bohr to Yogi Berra. I like to think it was Yogi Berra, because the old Yankee catcher had a knack for making nonsensical quips that were nevertheless full of wisdom.

The post-Covid era seems ripe for a Yogi-ism since economists and policymakers have been so wrong about the path of the economy and inflation. Yes, inflation is finally on a downward trend, but it has proven far stickier than the Federal Reserve and most economists predicted and remains above the Fed’s 2% target.

Headline CPI for August came in at 3.7%, up from 3.2% in July largely due to higher oil prices. Core inflation (excluding food and energy) fell month over month but is still above 4%. The Fed is making progress, but I can still hear Yogi’s voice in my head saying, “a nickel ain’t worth a dime anymore.” And don’t get me started on housing prices.

Almost there … but higher for longer?

How much work the Fed has left to reach its inflation mandate is the central question now. Fed watchers are anxiously asking, “Are we there yet?” hoping that the Fed Funds rate may not need to rise above the current range of 5.25%-5.50% to get the job done. If the Fed’s predictions are to be believed, the answer is “almost.” Projections released after its Federal Open Market Committee (FOMC) meeting last week showed 12 of 19 Fed officials favoring raising rates one more time this year before beginning to cut rates in 2024.

But Fed Chair Powell’s rhetoric last week was measured. The Wall Street Journal noted his use of the word “careful” six times during the post-meeting news conference. That may explain why the FOMC’s projections in 2024 and 2025 reflect a “higher for longer” theme when compared to its projections at the last three meetings. Members expect to cut rates by far less next year than they thought earlier. They now forecast a federal-funds rate of 5.125% at the end of next year and 3.9% by the end of 2025. [Figure 1].


This “higher for longer” theme has resulted in long-term bond yields approaching 2007 levels in recent days, trimming some of the gains that bonds had enjoyed this year. Bond prices fall as interest rates rise.