A new day for Federal Reserve policy

What the Federal Reserve's policy shift means for rates.

 

.

The Federal Reserve’s target for short-term interest rates essentially sets the minimum level of borrowing costs in the United States. On September 18, the Fed reduced its interest rate target for the first time in more than four years. The 0.5 percentage point reduction made the Fed’s new target a range of 4.75–5.00%.
 
Vanguard’s global chief economist, Joe Davis, and head of fixed income credit, Chris Alwine, explain the meaning of the central bank’s policy shift.
 

Transcript
Joe Davis: It felt like a long time coming, right, Chris? We’re talking about a Federal Reserve that's begun an easing process. I think it's, you know, it's welcome news. I mean, we've had, for two years, inflation coming down, really stubborn for a long period of time.

The labour market is still strong, but the unemployment rate's starting to rise a little bit. The rate of job growth has cooled. And so I think what we're seeing is a Federal Reserve that's trying to balance those risks by easing off the level of restriction, which means interest rates are high.

Chris Alwine: Yeah. The fact that the Fed has started in cutting cycle and fairly boldly at 50 basis points, with the explicit goal of stabilising the labour market. And that's important for the economy to continue to expand. And so I think the fed is on the right track.

The world today is we have inflation and growth around trend. And so the Fed is, is pursuing a path of normalisation of policy, which gives them the best chance of extending the economic cycle.

Joe Davis: And our forecast has some turbulence over the next six months, not a recession, but some but some turbulence. Trying to ensure that we have inflation anchored at that 2%, I think what we're saying for investors, listen, this is a good step in the right direction. Because the Federal Reserve is trying to ensure that the expansion continues.

Chris Alwine: Absolutely. And, you know, what are we doing with this? You know, what is our investment strategy here? In the active bond funds, there's really two big drivers—really, three if we think of security selection as well. But it's around what is our duration and yield curve positioning to want to be more price sensitive or less.

And with that, with the Fed starting a rate cycle that were biased to be long duration. And the second is on the credit risk that we take. Are we overweight to corporate bonds, for example?

That puts us in a position that we still like, corporate bonds. So we are overweight to that.

Joe Davis: We'll continue to monitor and, should it change, you'll be the first to let us know.

Chris Alwine: Absolutely.

Joe Davis: And I'll do the same on the economy.

Chris Alwine: Exactly.

 

 

24 Sep 2024
By Vanguard
vanguard.com.au

More Articles

Rise in SMSF inflows indicate more people are moving into the sector

Inflows to SMSFs have almost quadrupled over the past five years and experts warn this trend warrants...

Read full article

Interest rates likely to stay higher for longer

The recent rate hike suggests that the Reserve Bank of Australia is prepared to move policy into more...

Read full article

View Division 296 as two-stage event

SMSF practitioners should view the pending Division 296 tax as rolling out in two stages, leading to two...

Read full article

Iran conflict: Keeping perspective on market risk

Tensions in the Middle East have rattled global markets. Both equities and bonds have experienced losses amid...

Read full article

Know the difference between death benefit pension and normal pension or pay the price

It’s vital to know what is and what is not a death benefit pension because the consequences of not paying...

Read full article

Most Valuable Industries in the World 2026

Check out which industries make up the biggest portion of the global...

Read full article

SMSF trustees acting badly – further disqualification cases

Several recent court decisions highlight the expectations of SMSF trustees in regard to legislative...

Read full article

In turbulent times, stick to your long-term wealth strategy

Why investors are urged to resist impulsive decisions in turbulent times . Investors are being urged...

Read full article

Heathmont Financial Services Pty Ltd (ABN 68 106 250 104) trading as Heathmont Financial Services is a Corporate Authorised Representative (No. 262098) of Knox Wealth Management Pty Ltd (ABN 74 630 256 227), Australian Financial Services Licence Number (AFSL) 513763.

Julian McGoldrick is an Authorised Representative (No. 262098) of Knox Wealth Management Pty Ltd AFSL 513763.

Financial Services Guide - Disclaimer & Privacy Policy

^