Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.
In this article we review:
Our perspective on the recently concluded Federal Reserve meeting and subsequent press conference
Why we believe the overall path of the fed funds rate will be lower in the months ahead
Our outlook on the fed funds rate and Treasury Bond yield curve between now and year-end
Our perspective on current opportunities for fixed income investors
As expected, the Federal Reserve cut the fed funds rate by 0.25% at its November 7 meeting to a target range of 4.50%–4.75%. Regarding this decision and prospective Fed policy looking forward, we believe the following points are important for investors.
Path of rates remains lower. In his post-meeting press conference, Fed Chair Jay Powell struck a balance combining the Fed’s commitment to lower rates while doing so “not on a pre-set course” and “making decisions meeting by meeting.” He also stated, “We think that even with today’s cut, policy is still restrictive” and “the point is to find the right pace and the right destination.” All of this in our view being consistent with a data-based approach to the timing of reducing rates over the next several months.
Dual mandate in balance. Chair Powell also mentioned several times that the Committee’s dual mandate of maximizing employment and achieving price stability was now in balance, and it maintains the flexibility to act in either direction if necessary. However, most importantly, he emphasized that such flexibility would be applied through dialing up or down the pace of future rate reductions, thus reiterating the longer-term direction of lowering interest rates was expected to remain in place.
Fed still encouraged by inflation outlook. When asked about the most recent personal consumption expenditure (PCE) core inflation report being a touch higher than expected at 2.7% annualized for the month of September, Chair Powell emphasized the three-month annualized rate on core PCE tracking at 2.3%, and that he expected the annualized rate to converge toward that level as lagging effects of rent could soon rollover at lower levels. We view this as important background as to why the Fed continues to be confident inflation is trending toward their 2% long-term objective.
Powell not going anywhere. On a less economic note, Chair Powell also rebuffed political noise thrown at him through a couple of somewhat awkwardly worded questions asking if he would resign if asked to do so by President-elect Trump, replying with a simple one-word answer, “No.” In answering a related question, he also stated that the results of this week’s election would not be a factor in current Fed policy decisions.
Regarding our current interest rate and bond market outlook, we want to highlight the following:
Year-end fed funds target. We expect the Fed to implement another quarter-point rate cut at their upcoming December meeting to close out the year with a fed funds target range of 4.25%–4.50%. Thereafter, we believe the Fed will likely continue reducing rates throughout 2025 with a cadence of perhaps every other meeting or so into 2H 2025. Our best estimate on their ultimate destination is a range of 3.25%–3.50% by the end of next year, representing approximately an even 1% above where we believe annualized PCE core inflation is likely to be at that time.
Longer-term rates and slope of yield curve. It appears longer-term bond yields will maintain their recently established higher levels in anticipation of a strengthening economy and steepening yield curve. We now expect the 10-year Treasury yield to finish the year close to its current level at approximately 4.40%, representing a modestly upward sloping three-month to 10-year yield curve by year-end.
Opportunities for fixed income investors. In this environment, we believe corporate credit spreads will likely hold stable and strong risk-return opportunities remain for intermediate-term, investment-grade bonds in the 6- to 9-year maturity range. We see opportunities for A and BBB rated corporate bonds in the middle of the yield curve, where investors can lock in recently elevated yields while mitigating against reinvestment risk at the short end of the curve and duration-based price risk at the longer end.
Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be appropriate for all investors.
Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.
Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.
Growth stocks typically are particularly sensitive to market movements and may involve larger price swings because their market prices tend to reflect future expectations. Growth stocks as a group may be out of favor and underperform the overall equity market for a long period of time, for example, while the market favors “value” stocks. Value investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that an undervalued stock is actually appropriately priced.
Investments in global/international markets involve risks not associated with U.S. markets, such as currency fluctuations, adverse social and political developments, and the relatively small size and lesser liquidity of some markets. These risks may be greater in emerging markets.
The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.
Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.
The federal funds rate refers to the target interest rate range at which commercial banks borrow and lend their excess reserves to each other overnight, which is set by the Federal Open Market Committee.
The 10-Year U.S. Treasury bond is a U.S. Treasury debt obligation that has a maturity of 10 years.
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Transamerica Asset Management, Inc., (TAM) is an SEC-registered investment adviser that provides asset management, fund administration, and shareholder services for institutional and retail clients. The funds advised and sponsored by TAM include Transamerica Funds and Transamerica Series Trust. Transamerica Funds and Transamerica Series Trust are distributed by Transamerica Capital, Inc., (TCI), member FINRA. TAM is an indirect wholly owned subsidiary of Aegon Ltd., an international life insurance, pension, and asset management company.
