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SouthBayDem

(32,037 posts) Tue Apr 16, 2024, 11:45 PM Apr 16

Powell Dials Back Expectations on Rate Cuts

Source: Wall Street Journal (gift link)

Firm inflation during the first quarter has called into question whether the Federal Reserve will be able to lower interest rates this year without signs of an unexpected economic slowdown, Chair Jerome Powell said Tuesday.

His remarks indicated a clear shift in the Fed’s outlook following a third consecutive month of stronger-than-anticipated inflation readings, which derailed hopes that the central bank might be able to deliver pre-emptive rate cuts this summer. Officials had previously said they were looking for greater confidence that inflation was returning to their target and were optimistic another month or two of data might meet that standard.

“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said at a moderated question-and-answer session in Washington. The remarks were his first public comments since an inflation report last week sent stocks sliding as investors recalibrated their rate-cut expectations.

The S&P 500 fell slightly after Powell spoke, and investors sold Treasurys, sending up yields. The 2-year Treasury note yield briefly hit 5% for the first time since November.

Read more: https://www.wsj.com/economy/central-banking/powell-dials-back-expectations-on-rate-cuts-00e3e5d0?st=l7argbfep8mse5f&reflink=desktopwebshare_permalink

7 replies

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Powell Dials Back Expectations on Rate Cuts (Original Post) SouthBayDem Apr 16 OP

Not a surprise after last month's inflation news. All Mixed Up Apr 16 #1

If there might not be rate cuts this year, HUAJIAO Apr 17 #2

Higher inflation expectations causes bond yields to rise, and causes bond prices to fall. progree Apr 17 #3

I'm retiring in two months, age 62 The Mouth Apr 17 #4

Thanks very much for the detailed explanation. HUAJIAO Apr 20 #5

You're welcome 😊 And you are well justified to be cautious with not likely a long time to recover from a market crash progree Apr 21 #6

Thanks for pointing out that your portfolio keeps 60% in equities. Before retiring in 2020, I attended pre-retirement 24601 Apr 21 #7

All Mixed Up

(597 posts)

1. Not a surprise after last month's inflation news.

Reply to SouthBayDem (Original post)

Tue Apr 16, 2024, 11:56 PM

Apr 16

HUAJIAO

(2,391 posts)

2. If there might not be rate cuts this year,

Reply to SouthBayDem (Original post)

Wed Apr 17, 2024, 12:01 AM

Apr 17

why would people be SELLING Treasuries?

progree

(10,909 posts)

3. Higher inflation expectations causes bond yields to rise, and causes bond prices to fall.

Reply to HUAJIAO (Reply #2)

Wed Apr 17, 2024, 01:10 AM

Apr 17

Last edited Wed Apr 17, 2024, 05:34 AM - Edit history (2)

Bond prices always move in the opposite direction to yields.

"why would people be SELLING Treasuries?"

For example, a few days ago I found the purchasing power of an S&P 500 equity fund (VFIAX) is up 12.90%, while that of the VCOBX bond fund (mixed government and corporate bonds, intermediate term) is down 21.78% in the 3 years to 4/9/24. (Edited to add: Those are total returns, including reinvested dividends and interest, and then adjusted for inflation /end edit). People just don't want any more of that kind of punishment.

As an old person, I have a 60%-40% equities to fixed income allocation. The portfolio has been massacred on the fixed income side of things (most of my fixed income holdings are intermediate term bond funds. VCOBX -- Vanguard Core Bond Fund -- is one of my holdings).

EDITED TO ADD:

https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp

Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation. For example, if a bond pays a 4% yield and inflation is 3%, the bond's real rate of return is 1%

In other words, the higher the current rate of inflation and the higher the (expected) future rates of inflation, the higher the yields will rise across the yield curve, as investors will demand a higher yield to compensate for inflation risk.

Note that Treasury inflation-protected securities (TIPS) ((and I-bonds -Progree)) can be an effective way to offset inflation risk while providing a real rate of return guaranteed by the U.S. government.7 As a result, TIPS can be used to help battle inflation within an investment portfolio..

1/4 of my fixed income allocation is in TIPS and I-bonds. This is the part of my fixed income portfolio that isn't suffering.

When inflation heats up, some of the money that would have gone into bonds goes into commodities or commodity-related stocks like oil and gas companies. The lower demand for bonds causes bond prices to fall and the bad cycle for bonds begins. Some other bond money shifts to very short maturity investments like money market funds.

The Mouth

(3,155 posts)

4. I'm retiring in two months, age 62

Reply to progree (Reply #3)

Wed Apr 17, 2024, 11:19 AM

Apr 17

I have pretty much everything in a S&P500 index fund, been dollar-cost averaging into it since 1989....

HUAJIAO

(2,391 posts)

5. Thanks very much for the detailed explanation.

Reply to progree (Reply #3)

Sat Apr 20, 2024, 09:38 PM

Apr 20

I think I actually knew a lot of that but you cleared up some details for me.
I turned 80 last year. I live on SS and a modest retirement account. I decided I can NOT afford to "lose" any of it, so I have invested the last few years in T-Bills and CDs. And I-Bonds. So far I have not had to take large sums out of my retirement account. It is going down, but slowly. Anyway, it is a gamble. But I "ran the numbers' as well as I can. Of course if Trump gets elected and the fuckers go after SS and Medicare.. Yikes !!!

progree

(10,909 posts)

6. You're welcome 😊 And you are well justified to be cautious with not likely a long time to recover from a market crash

Reply to HUAJIAO (Reply #5)

Sun Apr 21, 2024, 08:37 AM

Apr 21

I see the Nikkei index is still below where it was in 1989 (38,916). It briefly finally broke above that this year for the first time, before going back down (37,068 at Friday's close). I keep this in mind when someone tells me broad equity indexes are guaranteed to recover in 10 years or less.

24601

(3,962 posts)

7. Thanks for pointing out that your portfolio keeps 60% in equities. Before retiring in 2020, I attended pre-retirement

Reply to progree (Reply #3)

Sun Apr 21, 2024, 09:21 AM

Apr 21

seminars/courses at work over an 18-month period. Several presenters were from the Society for Financial Awareness (SOFA.org), which had been contracted to provide us with useful information. When it came to asset balance, they made the point that the conventional thinking of shifting to government bonds for safety in retirement wasn't valid. Virtually all of the modeling shows that if you let your equities balance fall below around 60%, your retirement fund (IRA, 401K, or TSP) will draw down to zero before the end of your life expectancy. I stay slightly above 60%.The "insurance" against having to sell low for RMDs is to take out CDs that mature as RMDs are due.

One guy was also very entertaining. In addition to SOFA, he's a financial planner with private clients. He characterized most people as either Type A (savers) or Type B (spenders). His experience was that Type As tend to marry Type Bs. The spender usually ran the show daily; however, the saver would step in and take over the household budget when a crisis hit. That's pretty much the case in our home.

My late Father-in-law was very disciplined in his saving and investing. After he and my Mother-in-law died, all their kids were grandfathered into tier their investment management company's upper tier with reduced costs. This certainly wasn't the case on my side of the family where my parents lived paycheck to paycheck until they passed.

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