By Caley Perleberg, AVP Trust Portfolio Manager I

Season’s Greetings,

Many of you I’m sure have read the headlines and details with regards to the Federal Reserve’s statement last week. Here are the highlights and my takeaways:

  • A significant shift in policy
    • As the market was anticipating, they’ll double the monthly “tapering”/drawdown of Treasury and MBS’ purchases
    • Anticipation is it will end early 2022, much faster than expected
  • The change is warranted to give the Fed some bullets to fight inflation next year, should it persist at these elevated levels
  • Here’s the big one: they now expect THREE rate hikes in 2022, more aggressive than what the markets were expecting
  • Equity markets shot up as they view it as the Fed acknowledging inflation concerns and stepping up if/as necessary
  • What’s fascinating is:
    • Recently short-term rates have been rising recently, while the 10-year has been in the 1.40 – 1.60% range
    • The long end of the curve, to an extent, is signaling long-term inflation isn’t a big concern (otherwise it’d be higher)
    • If we get three rate hikes at 25 bps each, the yield curve is going to quickly flatten, or long-term rates are going to have to increase

BOTTOM LINE: Our portfolios are well positioned for inflation (overweight to Equities, and in the Bond portfolio overweight’s to High Yield and TIPs), and come early 2022 we’ll look to make surgical changes to combat rising interest rates.