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

Most Reliable Car Brands in 2026

Check out which car brands are the most likely to stay on the road and not cost you a fortune to...

Read full article

Super versus trusts: What is the best option with Div 296?

Super used to be clearly the “best” option due to low tax rates but the increasing complexity of things...

Read full article

AI use needed with proper safeguards

The SMSF Association has suggested practitioners servicing the sector must equip themselves with more than...

Read full article

Thinking of establishing an SMSF? Don’t skip reading the rules

As the establishment of new SMSFs continues to rise, the ATO is reminding potential trustees to ensure they...

Read full article

Are downsizer contributions losing steam?

Tax Office data shows fewer people used its super scheme in 2024-25 . Introduced in 2018, the home...

Read full article

Investment and economic outlook, February 2026

latest forecasts for investment returns and region-by-region economic outlook . Australia A rate...

Read full article

Coercive control in SMSF becoming a hot issue

AFCA is anticipating there will be more focus on coercive control and elder abuse going...

Read full article

What to look for when choosing a financial adviser

Here's how to find a financial adviser who can provide the right support for you . We believe...

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

^