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CIP Quips

Rate Stalemate

What’s in the News: 

As expected, the Fed left its benchmark interest rate unchanged at its September 20th meeting.  The Fed indicated that it remains on pace to raise short-term rates later this year, signaling one more rate hike in 2017, three in 2018, two in 2019 and one in 2020.  However, a more gradual pace of rate increases is a real possibility.  

Fed Chair Janet Yellen also touched on inflation in a baffled tone, “I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been as low”.  

Our biggest takeaway from the meeting was that the Fed announced that it plans to kick off trimming its $4.5 trillion balance sheet next month.  The plan is to allow bonds to mature without reinvesting the $4 billion a month in mortgage securities and $6 billion in Treasuries.  The Fed will look to raise these amounts every quarter until run off’s reach $20 billion and $30 billion respectively.  At the pace outlined, it will take several years before the Fed has “normalized” its balance sheet.  



What are we thinking?

Amid low inflation, accommodative central banks and a long runway for rate hikes and balance sheet normalization, it’s not surprising to us that the fixed income market has not reacted much to the billions of dollars that will be exiting the bond market soon and to the Fed’s assuredness of higher interest rates in the near future.  The Fed’s process of normalizing rates began at the end of 2015 and has been slow going, not unexpectedly, in our opinion.  But while income investors continue to wait on bended knee for higher yields, we suggest looking for an investment grade, conservative income strategy designed to both provide high income without taking excessive risk in a low rate environment, and benefit from rising rates as they occur - such as CIP.  



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