Recap | Week Ahead | The Fed's Mandate
“To Promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” - The Federal Reserve’s Mandate: Federal Reserve Act, Section 2A
Last week's market recap:
- The S&P 500 closed the week up 1.59%. Year-to-date the index is up 1.54%
- NASDAQ closed the week up 2.26%. YTD the index is up 2.01%
- U.S. Aggregate Bond index was down -1.10%. YTD the index is down -1.39%
- 10-Year Treasury Rate increased, ending the week at 4.15% up from 3.96% the prior week
- Fed Funds Target rate remains at 5.25-5.50%
- The 1-Year Treasury is yielding 4.86%
- A 6 Month Treasury is yielding 5.29%
- Short term rates are trending lower. Reinvestment Risk for short term debt remains elevated.
The week ahead:
- Federal Reserve Interest Rate Decision
- Consumer and Wholesale Inflation figures
- 4Q23 real GDP (first estimates)
Quick Comments:
The S&P 500 and Nasdaq both broke out to all-time highs. The U.S. 10 year treasury yield increased above 4.10%. Moderate long term interest rates could be viewed as a healthy market and it’s in-line with the Fed’s Mandate.
What can the Fed do next?
After raising the target Fed Funds Rate by 500 basis points, what can the Fed do next?
1) Fed Holds Rates
- In this environment, Short and Intermediate Bonds usually outperform T-Bills.
- Higher carry from Short Duration Income should lead to higher returns than cash equivalents and core bonds.
2) Fed cuts Rates
- Short Term yields fall more than long term yields when the Fed cuts rates.
- Duration provides a tailwind for bond returns as rates fall. T-Bills, CDs, and money markets get re-invested at lower rates. This is re-investment risk.
3) Fed Raises Rates
- Stubborn inflation puts upward pressure on longer-term rates.
- Shorter dated bonds offer better protection vs Core Bonds
Source: Blackrock – *Student of the Market
As always, let us know if you have any questions.
Best,
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
Phillip Tompkins, CFP®
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