James Quinn

Welcome to the latest PineBridge Investments’ Podcast. My name is James Quinn, Head of UK Intermediary Sales. Today, we're going to discuss the Fed’s recent decision to hold interest rates steady, key factors to watch going forward and the broader market implications of this latest development. And I'm delighted to welcome Rob Vanden Assem, Head of Developed Market investment Grade, and Ash Shetty, Portfolio Manager and Risk Strategist.

Gentlemen, welcome to the podcast. Okay, let’s kick it off. Maybe if we start with Rob. Rob what were the key factors behind the Fed’s latest decision on interest rates?

Rob Vanden Assem

Well, as you know, the Fed left rates unchanged and really focused on the, you know, their dual mandate, that is inflation and unemployment. Right now they seem to be pretty satisfied as to where they are. It's interesting how they have refocused it seems more on that dual mandate, whereas not too many months ago its key focus was solely seemingly on inflation. I think in both cases we're seeing moderation. And I think they're encouraged by that. And they just feel that they need additional numbers to solidify that position.

As of today, we did get a weaker unemployment report, which the market is taking as a signal that rate cuts are on the horizon. Now we're looking at the markets pricing in about four cuts by year end. We might take the under on that, but the directionality is there, and as long as those numbers continue to show those indications, we're likely to continue to see lower rates.

As we look ahead there, there's still more numbers to come though, there are two more inflation numbers, one more job report. So, again, that can moderate that view. But I think generally speaking, it looks like we're headed towards rate cuts in September.

James Quinn

And Ash, how do you expect the Fed's decision to impact credit markets in the nearer term?

Ash Shetty 

Yes, that's a good question. So, we anticipate that the near-term impact on credit markets will likely be muted, as markets had already priced in the rate cut in the September meeting. As Rob mentioned, we anticipate the Fed will cut interest rates in September and followed by two more cuts in subsequent meetings. But our outlook hinges a lot on inflation continuing to moderate and the economy showing signs of slowing down. In the near term, we think, in credit specifically within sectors such as banking, utilities, and consumer cyclicals, are likely to benefit as the Fed begins its rate cutting cycle.

James Quinn

Okay thanks, Ash. So we've got some of the likely beneficiaries there. Maybe you could develop that a little bit. So, you know, what are some of the risks to your view? I mean, we've seen a lot of speculation; the power might be behind the curve. What do you think about that?

Ash Shetty 

So the underlying risks to our views are clearly tilted to the downside. Actually, a lot hinges on the evolving political landscape in the US, geopolitics and the upcoming data that Rob mentioned that we have two more inflation data and one more jobs data coming out. So let's say if the new government policies lead to increase tariffs, or higher fiscal spending, that could potentially drive inflation higher and change the inflation outlook, as sustained economic weakness and increased geopolitical tensions could also put pressure on credit spreads. And if markets continue to believe that the Fed is behind the curve, like the reaction we are seeing today, for example, and we continue to see some really weak economic data, we could see some material credit spread widening.

James Quinn

Thanks Ash, and maybe pivoting back to Rob. I mean, let's go big picture now. Rob, what is the outlook for interest rates and credit markets over the next 12 months?

Rob Vanden Assem

I think generally speaking, we're expecting lower rates. Within that view, you're going to see a steeper yield curve, with the short end coming down. And at some point, you're probably going to see some underperformance in the long end as that curve adjusts to a more normal shape. But nevertheless, our view is that rates are headed lower right now. Obviously a lot of that is being done as we speak now. But again, the key is that we continue to move towards that inflation target that the Fed has.

Within credit, I think, a lot depends on how the market perceives the Fed in terms of where they are on the curve. As Ash mentioned, if you look today, part of the spread weakness, I think can be attributed to a fear or potential fear that the Fed may be behind the curve, given the weakness and the number. So, you're going to have volatility driven by that, you're going to have volatility driven by supply, you're going to have volatility, as Ash mentioned, driven by political factors, which obviously, this year being an election year will have an impact as well.

Generally speaking, the fundamentals, though, we think are pretty solid. And we continue to have the view that, as we look forward, we don't see the signals that we're going to see some really concerning issues surrounding that fundamental view. So really, it's kind of a technical supply demand and also a sentiment indicator that will likely drive markets over the next several months and into next year.

James Quinn

Brilliant. Thanks, Rob. That wraps up today's episode on the Fed’s latest decision and its implications for interest rates and credit. We hope you found our discussion insightful and that it helps you navigate the financial landscape ahead.

A big thank you to Rob and Ash for sharing their expertise with us today.

Please visit pinebridge.com for more in depth investment analyses and insights.

Till next time, thanks for listening.