What are your expectations regarding the pace of Federal Reserve tightening and inflation?
On the Fed, they're very transparent these days. They have the DOTs, the Statement of Economic Projections. They tell us they expect two more tightenings this year, three next year and then two in the following year, that'd be 2020. I doubt they are able to deliver their DOTs. I think they'll deliver this years DOTs. That'd be 50 basis points more from where we are today. I wouldn't be surprised at all if a slow down globally, if the fading of fiscal impulse, if Euro Zone challenges related to Italy in the next twelve to eighteen months may cause the Fed to stop tightening before they get to over 3% which is what they tell us they're going to do. Calling it now is tough. It depends a lot on the inflation outlook. We expect inflation to stay two or higher going forward. The Feds target is 2%, they've largely hit it. But I doubt they're going to be able to deliver the DOTs and get us above three.
How should fixed-income portfolios navigate given trade conflicts, rising rates and inflation?
Tariff's cut both ways. Trade conflicts, rising tariff's here and abroad in sort of a tit-for-tat manor across nations should feed inflation. Inflation's bad for bonds. That should cause yields to rise. However, trade conflicts also have a strong track record of slowing down global growth. Slower global growth, that's good for bonds. So you have a bunch of counter bailing forces there in terms of how trade conflicts and tariffs can drive interest rates. On net it seems that the inflationary impulse from trade conflicts will probably be outweighed by the growth challenge that the trade conflicts could present. I say could because we don't know yet if we have a full-blown trade war. So, in the environment that we face with the uncertainties related to trade which evolve every day and with every tweet, it appears the thing that we are doing in fixed income at Federated modestly short duration, overweight credit quality. So that includes modest overweights to high yield to investment grade corporates to commercial mortgage backed securities. Pros cyclical corporate private assets that are going to give us better relative returns as interest rates continue to edge upwards.
Views are as of June 25, 2018 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices. Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment grade securities. The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest rates, and although the securities are generally supported by some form of government or private insurance, there is no assurance that private guarantors or insurers will meet their obligations. Federated Investment Management Company 18-74998 (6/18)