Jeff Weaver, head of Global Liquidity Solutions, and Henri Proutt, portfolio specialist for the Global Liquidity Solutions team, discuss the May 3, 2023, interest rate hike by the FOMC, or Federal Open Market Committee.
Jeff Weaver: We were expecting yesterday’s rate hike, and now we do expect the Fed (Federal Reserve) to pause at its June 14 meeting. The caveat is the data. So, between now and then, we’ll be watching jobs and inflation.
Henri Proutt: That’s Jeff Weaver, head of Global Liquidity Solutions here at Allspring. And I’m Henri Proutt, portfolio specialist for the Global Liquidity Solutions team. And you’re listening to On the Trading Desk®. Today, we’re discussing the May 3 interest rate hike by the FOMC, or Federal Open Market Committee. Thanks for being here, Jeff.
Jeff: Thanks for having me, Henri.
Henri: Jeff, on May 3, the FOMC raised the overnight rate by another 25 basis points [100 basis points equals 1.00%.]. So, the new range is 5.00% to 5.25%. The outcome was widely expected by Allspring and by the market, having been fully priced in. And the language in the statement was changed to indicate that it may be time to pause. However, inflation remains elevated. What are you and the team watching between now and the next FOMC meeting on June 14?
Jeff: As you mentioned, we were expecting yesterday’s rate hike and now we do expect the Fed to pause at its June 14 meeting. The caveat is the data. So, between now and then, we’ll be watching jobs and inflation. Before the June 14 meeting, we will be getting new jobs reports. The nonfarm payroll reports this year have been stronger than the Fed has anticipated and, quite frankly, hoped for. So, a deceleration to a level of less than 200,000 additional jobs each month will be supportive of a Fed pause, as this will indicate that their policy is working. On the inflation front, the Personal Consumption Expenditure Index, the PCE, continues to decline. The PCE declined to 4.1% this past month, while core PCE, which excludes food and energy, was at 4.6%. Those are down from a peak of 7.0% on headline and 5.5% on core. So, we expect that the Fed will want to see those numbers continue to come down.
Henri: Great. Yeah, we’ll be paying close attention to the PCE Index when it gets released next at the end of May. Switching gears a little, we’ve seen some regional bank failures, and that leads to some concerns among credit investors. How do the credit markets feel right now?
Jeff: We watch credit spreads closely. Following the banking concerns in March, we saw short-term corporate spreads widen. What we’ve seen since then was some retracement of that. Nonfinancial spreads are actually back to where they were prior to March, whereas we saw bank spreads widen more significantly and about half of that widening has been retraced. I think what’s important is that several large, domestic, well-capitalized financial institutions have been able to access public markets following first-quarter earnings. These include Bank of America, Morgan Stanley, and Wells Fargo, and they were able to issue about $20 billion in debt.
Henri: Yeah, certainly that’s supportive from a sentiment perspective to see primary market activity pick up in April after it was effectively shut down in March. And it really probably needed to come from some of those safe-haven institutions, such as the ones you mentioned. Last question here, just quite simply, what do you like?
Jeff: Well, this is my favorite question, Henri. I like 5%. Investors in the front end can achieve 5% by investing in money markets, commercial paper, short-term corporate bonds, asset-backed securities. So, in short-duration fixed income right now, earning 5% is quite attractive. And those investors who take advantage of that will be happy they did.
Henri: Thanks for your insights, Jeff. Thanks for being here. We look forward to talking with you soon.
Jeff: Thank you, Henri.
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