Special Fed Coverage: How Investors Should Read a Rate Hike
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What did the Fed announce about the 0.25% rate hike and the new target range?
special Federal Reserve edition of Your Money Briefing. I'm J.R. Whalen at The Wall Street Journal in New York. On Wednesday, and as expected, the Federal Reserve raised interest rates for the fourth time this year. The Fed raised rates a quarter percentage point to a range between 2.25 percent to 2.5 percent. But the Fed sees choppy waters ahead. Here's Fed Chairman Jerome Powell.
Many FOMC participants had expected that economic conditions would likely call for about three more rate increases in 2019. We have brought that down a bit and now think it is more likely that the economy will grow in a way that will call for two interest rate increases over the course of next year.
So how should investors interpret the Fed's thinking? We're joined by Greg Peters, he's Senior Portfolio Manager. at PGIM fixed income to spell out the details for us. So Greg, the Fed's decision to pare back its plans to raise rates in 2019 is the result of market instability in large part. But how should investors, retail investors and otherwise, adjust their portfolios for this?
I thought the message on Wednesday was really quite confusing as some of the information out of the statement, from the dot plot, from the press conference really created more confusion than any clarity. And the markets have responded in kind. I think it's very difficult to interpret what the Fed is really trying to portray. However, I do think it is a message of they'll continue to try to raise rates. So they have taken it down from three to two on a median in 2019. Keep in mind that they added a rate hike after the tax cut and the fiscal spending. So they really just reversed that. This time around. And so the markets were really looking for more. At the same time, the long term dots. So whereas Fed funds would out the long term, they also reduce that, which is positive.
And so there's some positive elements and there's some negative elements or not so positive elements.
How did Fed Chair Jerome Powell describe the outlook and projected rate path?
And I think that is creating a lot of interpretation confusion from a market standpoint.
Well, the markets were sort of confused. I mean, after the Fed statement came out Wednesday afternoon, the market dropped as many as 450 points.
Well, you know, the whole notion of a dovish hike is akin to jumbo shrimp. It just doesn't make a lot of sense. And so I think to try to thread that needle is just inherently really difficult. And so I think we're set up somewhat for the impossible. And so I'm not surprised that the markets had a hard time interpreting because, quite frankly, it was almost impossible to interpret in the first place.
And so for clients at PGIM who are looking at their portfolio and taking time at this time of the year anyway to sort of revisit things or recalibrate things, what's the recommendation for them to navigate this time of Fed movement and instability?
So I think the big difference year over year is risk-reward. And so on one side of the aisle, you have the reward much higher than where we started this time last year, particularly on the credit portfolios. And so credit spreads have widened pretty significantly this year. That's a good news, bad news story, clearly. But the starting place for 2019 is a much better place. At the same time, you have a continued proactive Fed and risks are rising. So I think that means more defensiveness. And indeed, we are more defensive in our own portfolios. And so we are taking our risk down broadly. We actually do think there's value in yields. So if you think about the debate just six months ago, investors were so worried about yields shooting higher that
I don't think you have that same concern going forward. And so I think having fixed income in the broader portfolio makes a lot of sense for investors as it's defensive and it should protect you in times of turbulence.
So having some more of a conservative profile to your outlook and the way you're going to set out to 2019, there's a lot of good in that.
There is. There is. The big difference year over year is also the front end or cash.
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