Investable Years With High-Income Levels

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

The Federal Open Market Committee (FOMC) comprises the Federal Reserve System’s decision-makers on monetary policy in the United States. This monetary policy is designed to keep the Fed’s dual mandate of maximum employment and price stability in line with targets. The Fed has various tools or methods to accomplish its mandate including controlling the money supply and raising or lowering the Fed Funds rate as needed. The FOMC meets every 6 weeks or 8 times per year and can hold emergency meetings if deemed necessary. They met last week and announced that they would not be changing policy.

From 2022 through July 2023, the Fed raised the Fed Funds rate 11 times over a 12-meeting span for a total of 525 basis points. Since last July or over the last 5 meetings, the Fed has held rates constant at a 5.25%-5.50% target range. The bond market has been hyper-focused on the Fed and its reaction to data on inflation, employment and productivity. The market has been anticipating as many as six Fed interest rate cuts in 2024 but has pulled back expectations to three. The Fed’s loudest message has been its commitment to bringing inflation down to its 2% target level.

For the most part, it appears the market has cooperated. Economic growth has exceeded nearly everyone’s 2024 expectations and employment has remained sturdy. However, inflation has been sticky with the latest data releases reversing the downward trend and reflecting higher estimated levels. The market will keep a close eye on the next inflation release’s direction.

In general, the market has reflected a more optimistic tone with an indication that liquidity is flush and businesses and consumers are ready and willing to spend. There is a “but” however and that is at what expense? Americans have shown a propensity to spend money – disposable income or savings. When the spending relies on borrowed money, that is when destructive consequences can emerge. There is an ongoing debate as to whether consumption can drive an economy but it may be like the chicken and egg discussion. The U.S. GDP is comprised of roughly 70% of consumption expenditure by households making it almost impossible to ignore.

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