Thank you for your message. We will contact you shortly.
The Fed holds steady, but signals one more hike
The U.S. Federal Reserve kept interest rates unchanged at the September policy meeting, as expected. The committee left open the possibility of one more hike later this year.
The U.S. Federal Reserve left interest rates unchanged at 5.25% - 5.50%, a 22-year high. The policy statement contained minimal changes to key wording, and Chair Jerome Powell continued to signal reasonably high odds of another rate hike later this year.
The policy statement continued to characterize inflation as “elevated” and upgraded the language about growth to “solid” from “moderate.” The policy outlook language remained unchanged, discussing “additional policy firming that may be appropriate.”
The updated summary of economic projections showed a large upward revision to 2023 real GDP growth, from 1.0% to 2.1%. The core inflation forecast was revised down slightly, from 3.9% to 3.7%. The dot plot of rate expectations continues to show one more rate hike this year, as expected, while the 2024 dots moved higher to reflect only 50 basis points of rate cuts next year.
In his press conference, Chair Powell emphasized that the Fed remains committed to decreasing inflation to the 2% target. He said that the FOMC can afford to “proceed carefully” and will take upcoming decisions on a “meeting-by-meeting” basis. This likely signals a strong possibility, but not a certainty, of one more rate hike.
Recent data have been supportive
The data released during the intermeeting period broadly supported the Fed’s prior economic projections. Core CPI inflation has moved down to +4.3% year-over-year, a -1.4 percentage point deceleration so far in 2023. On the other hand, core services excluding housing, a key measure for the Fed, re-accelerated to its fastest pace in almost a year.
The labor market remains bulletproof, adding around 150,000 jobs on average over the last three months. At the same time, the participation rate has moved higher, with prime-age employment reaching a 22-year high. Nevertheless, cracks are emerging, as the quits rate is now below the 2019 level and the number of job openings continues to fall.
The economic outlook remains healthy, with growth slowing but not collapsing. This is what the Fed wants, and it should be sufficient for inflation to decline through the end of the year. We continue to forecast a material growth slowdown over the coming quarters, with a year-end core inflation rate near 4%.
What does this mean for investors?
With the Fed inching closer to the end of its rate hikes and the economic backdrop remaining uncertain, volatility will likely pick up again. We continue to believe Treasury yields should moderate over the course of this year and expect the curve to become less inverted.
For investors looking to increase yield without moving into full risk-on mode, we think it makes sense to explore areas of the broad bond market, including municipals. One way to do this is by adding to investment grade corporate bonds, which have relatively longer durations than the broader fixed income market. They are also currently yielding close to 6%, and defaults are expected to remain low. We also favor selectively taking on risk in other credit sectors like senior loans, emerging markets debt and preferred securities, although duration in these categories is lower than in corporate bonds.
While investors may find ways to play offense and defense in the U.S. equity market, the S&P 500 Index is currently trading at an approximately 6% premium to its 10-year average on a forward price-to-earnings basis. These rich valuations help inform our neutral stance on U.S. equities overall. But allocating more broadly via a globally diversified equity portfolio provides attractive opportunities in certain pockets of both developed and emerging markets.
In private capital markets, we prefer allocating to income-producing asset classes with the potential for returns less correlated to the broader market. In particular, we see compelling opportunities in select areas of private credit and private real estate.
Federal Reserve Statement, September 2023.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
This report is for informational and educational purposes only and is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice or analysis. The analysis contained herein is based on the data available at the time of publication and the opinions of Nuveen Research.
The report should not be regarded by the recipients as a substitute for the exercise of their own judgment. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. It is important to review investment objectives, risk tolerance, tax liability and liquidity needs before choosing an investment style or manager.
Nuveen, LLC provides investment solutions through its investment specialists.
This information does not constitute investment research as defined under MiFID.