The Fed has Been Bamboozled
Mr. Powell has done a great job managing U.S. monetary policy over the last couple of years. He has arguably successfully toed the line of inflation and economic growth like no other Fed Chair has done before. Jerome Powell even went as far as giving himself a “pat on the back” in September of 2024 for his success. Then here comes President Trump! Not only has Trump undermined his friends to the North and around the world with his protectionist policies, but he has even upended Mr. Powell’s planned ride into the sunset.
Yesterday’s FOMC meeting is a great example of the angst that the Fed is now feeling from within their own ranks. Even as the Fed left rates unchanged, there were a couple main points from today’s meeting that caught our eye at Wealhouse:
- The start of quantitative tightening (QT) run off (IE easing) despite Governor Waller’s dissent (rare).
- 2025 GDP growth was revised down notably by 0.4% to 1.7%.
- Core PCE inflation was revised higher to 2.8% from 2.5%.
- The unemployment rate projection was also lifted by a 0.10% to 4.4%.
In light of Trump’s tariff tactics, the Fed is now forced into a very real scenario that all central bankers despise, stagflation. The evidence is so obvious in the new projections above, showing an expected decrease in economic growth combined with rising sticky prices. Mr. Powell was even quoted today in his press conference saying “progress on inflation is delayed”. While Mr. Powell was famously able to explain away the rapid boost of inflation post-Covid as “transitory” even he is unsure that’s the case this time around.
On the other side of the coin, what the Fed can’t control is fiscal policy and boy is it heating up! Just recently, German bond yields rose the most since the fall of the Berlin wall as Germany readied a bazooka spending bill to combat tariffs and support their economy. Canada and many other countries are also going the similar route. These policies will further put pressure on inflation and interest rate yields.
What does this mean for bond investors? We are entering a period of volatility for government bond yields that create immense opportunities for active long/short strategies like the ones at Wealhouse, specifically for the Amplus Credit Fund. The Amplus team has taken this period of volatility to prudently increase credit exposure while actively managing interest rate exposure across the yield curve. We are looking forward to further opportunities into 2025 for our clients.
Disclaimer
This Commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Wealhouse has no duty or obligation to update the information contained herein. This Commentary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Wealhouse believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
