Page 20 - Investment Advisor December 2022/January 2023

RETIREMENT & ANNUITY UPDATES

By John Manganaro

The Fed’s Silver Lining

Higher rates present an opportunity to lock in attractive yields moving forward.

n Nov. 2, the U.S. Federal
Reserve raised its benchmark
Ointerest rate by 75 basis points,
marking the fourth consecutive hike of
that magnitude undertaken this year.
Federal Reserve Chair Jerome Powell,
offering remarks at the end of the
closely watched Federal Open Market
Committee meeting, said incoming data
suggests the ultimate level of interest
rates will likely be higher than previ- Jerome Powell, chairman of the US Federal Reserve
ously expected. While Powell’s speech
has been perceived by market analysts ent an opportunity to lock in attractive England feels a slowing of the pace of
as “remaining hawkish,” the Fed Chair yields moving forward. rate hikes does not equal a pause, and
also emphasized that it could be appro- the final destination of rates may be
priate to slow the pace of increases “as IMPLICATIONS higher than currently anticipated. He
soon as the next meeting or the one In written comments shared with says the Fed very well may stay higher
after that.” ThinkAdvisor following the FOMC for longer, until they see clear and con-
“No decision has been made,” Powell meeting, Jason England, global bonds vincing evidence that inflation is return-
said, and he stressed that the U.S. portfolio manager at Janus Henderson ing to the 2% target.
economy still has some ways to go before Investors, says he is not surprised to Taking to Twitter in the wake of the
rates are tight enough. Powell added that see a fourth straight 75 basis-point Fed meeting, Kathy Jones, chief fixed
it is “very premature” to be thinking hike. He points out that key data income strategist at the Schwab Center
about pausing. released since the last FOMC meeting for Financial research, pointed out that
As noted by FOMC watchers in the all but guaranteed another unusually bond market volatility is now approach-
wake of Powell’s remarks, the Fed’s deci- large rate increase. ing the March 2020 highs seen during the
sion was unanimous, and it lifted the According to England, once the FOMC height of the first wave of the COVID-19
target for the benchmark federal funds statement was released, the focus of pandemic in the United States.
rate to a range of 3.75% to 4%. This is the investment analysts shifted quickly away As Jones noted, the equity and bond
highest level since 2008. from the large current hike to the new markets now appear to be pricing in
For retirement-focused investors, one language in the statement around the smaller rate hikes, likely 50 basis points
of the highlights from Powell’s speech pace of future rate hikes. England says in December, but a higher peak rate.
came when he said he feels the pace of there is particular interest brewing with Writing in response to an inquiry from
hiking is not as important as “how high respect to how the Fed will take into ThinkAdvisor, she offered some more
we will need to get on rates.” Ultimately, account the cumulative tightening that specific thoughts about what retirement
according to Powell, the level of the has already been done, and the simple investors should take away from this
terminal rate may be higher than previ- fact that monetary policy works on a lag. week’s Federal Reserve news.
ously expected. “Although Chair Powell did hint “For retirees, the rise in yields is a
Market experts say this message has about slowing the pace of hikes at one great opportunity to generate income
both positive and negative implications of the next two meetings, he did say that for portfolios,” Jones says. “This is the
for investors. While they may see fur- it is premature to discuss pausing and it first time in years that yields have been
ther losses on the equity side, and while is not a conversation the committee is this high, and the rate outlook provides Al Drago/Bloomberg
the market value of a given bond portfo- having now,” England noted. income investors a chance to lock in
lio could fall further, higher rates pres- In considering Powell’s remarks, those yields for the long term.”

18 INVESTMENT ADVISOR DECEMBER 2022/JANUARY 2023 | ThinkAdvisor.com