By: Dave Chenet, CFA, CAIA®
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.38%|
Source: YCharts, Yahoo! Finance, WSJ
Markets were broadly higher in a week that saw continued volatility on the back of the ongoing turmoil in US (and now global) banks and a Federal Reserve that gingerly toed the line between giving in on the fight against inflation and being tone-deaf to the mounting evidence that its policies are leading to economic and market-related stress. The Federal Reserve elected to continue on its path of monetary tightening by increasing the Fed Funds rate by 0.25% to 4.75%-5%, but also signaled to markets that it is close to (or perhaps has already reached) the end of its policy tightening. Markets, in turn, are not only expecting rate hikes to be done but that interest rate cuts will begin by the summer. While we see continued moderation in inflation, we also expect inflation to remain above the level at which the Fed will be comfortable cutting rates.
Economically, recession fears continue to concern investors and incoming data on long-lasting manufactured goods orders pointed to weakness. In his press conference, FOMC Chairman Powell opined that tightening lending standards would act similarly to rate hikes in slowing growth and containing inflationary pressures. Data on related to both consumer and corporate borrowing corroborate this assertion, with evidence pointing to slowing credit creation and lenders requiring higher interest rates to accept credit risk.
What We’re Reading:
Chart of the Week:
A decade-plus of low interest rates have made the burden of a ballooning level of US government borrowing less onerous, however, the rapid increase in interest rates over the course of the last 16 months has dramatically increased the cost of servicing elevated levels of government debt. Currently, annual interest payments of ~$850 billion surpass the $842 billion allocated to defense spending in the budget that the Biden administration submitted to congress. In its efforts to fight inflation, the Federal Reserve has exposed cracks from both government and segments of the private sector which have relied on low interest rates (i.e. SVB bank & others). Controlling interest expense in the future will likely require increasing government revenue through taxation or pursuing a higher inflationary environment (or, likely both).