Falling Yields Good for Risk Appetite

Last Edited by: LPL Research

Last Updated: November 16, 2023

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Jeffrey Roach (00:02):

Let's talk about why rates may drop from here, but we have to set the stage. First, the real Fed funds rate is positive, and this is important. What this means is the upper bound of the Fed funds target is above the inflation rate, and as inflation decelerates enough to get closer to 2%, we could see the Fed ease up, especially if growth sputters. Take the summer of 1995, for example. We had inflation at 3% and the Fed funds rate at five and three quarters. As the economy slowed, the Fed cut rates, even though inflation was on the hotter side. See that boxed area in the chart. And I think the Fed could use 1995 for their playbook next year. Second, our inflation dashboard is getting more green. As shown in the chart, the annual rate of headline inflation is just above 3% and will likely decline further from here. Despite inflation running above the Fed's target, the Fed will likely hold rates steady at the next few meetings as policymakers and investors too, for that matter, remain concerned about the lagged effects of monetary policy. Third, we see an improvement in risk appetite from an investment standpoint. We could see some encouraging moves in the near term with the Fed likely done hiking rates and yields, seemingly getting back down to attractive levels. Bond returns have become increasingly competitive with equities. If you want more insights on global market trends, follow us on social media and take care.

 

In this edition of the Econ Market Minute, Jeffrey Roach, Chief Economist for LPL Financial, shares three important charts covering risk appetite, inflation, and the real fed funds rate.

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