D.A. Davidson Director of Wealth Management Research James Ragan reviews and analyzes the March Federal Open Market Committee meeting, the new SEP and Fed Chair Jerome Powell's press conference and discusses monetary policy and expectations for coming rate cuts.
Transcription:
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Gary Siegel (00:09):
Hi, and welcome to another Bond Buyer Leaders Forum Event. I'm your host bond buyer, managing editor, Gary Siegel. My guest is DA Davidson, director of Wealth Management Research, James Ragan. Today we're going to discuss monetary policy including yesterday's federal open market committee meeting. James, welcome and thank you for joining us.
James Ragan (00:35):
Yes, thank you, Gary. Pleasure to be here. Thanks for having me today.
Gary Siegel (00:41):
My pleasure. So was there anything in the FOMCs post-meeting statement, the summary of economic projections or fed chair Jerome Powell's press conference that either surprised you or grabbed your attention?
James Ragan (00:58):
Yeah, there were. So on the surface it was very much maybe in line with expectations, but there were a few surprises in there. When we looked at the summary of economic projections or the DOT plot, it was a little surprising to see the median 2024 GDP forecasts tick higher from the Fed voters. It went to 2.1% from 1.4% in December, and then 2025 moved higher as well to 2% from 1.8. And the reason why that's, I think that was a little bit of a surprise is the Fed has talked about expecting the economy to slow a bit and the policy has been in restrictive territory. And so those GDP forecasts are above the fed's long-term trend, which maybe is a little bit more than 2% or a little less than 2% expected for GDP. And so the fact that we're seeing trends above that and they see GDP continuing to exceed expectations despite the restrictive policy is a bit of a surprise.
(02:06):
Also, within the summary you had, you did see nine fed voters look, see two or fewer cuts this year. It wasn't a big change from the December plot, but it does show that it's a pretty tight it dispersion between either two or three cuts this year. So if one voter one more had gone over to the two camp, we might've seen a little bit of a lower expectation for the Fed funds expectation this year. And then the other area, I'd just say from the press conference, chairman Powell acknowledged the inflation uptick in January and February. And I wouldn't say he was quite dismissive about it, but he did make it very clear he didn't feel like the uptick really alters the progress that the Fed has seen that the economy's making on inflation. And he really showed great confidence in getting to that 2% level. And I think the market, obviously equity markets have rallied behind that quite a bit. And then I think there was, didn't really address the quantitative tapering, the QT tightening as far as timing on that, but I took away from the conference that we could see them, since he talked about it being very soon, we could see them start to reduce the bond runoff as early as the May meeting perhaps.
Gary Siegel (03:37):
You mentioned the GDP change that was quite the sizable change. Normally if they change it, it's one or two tenths of a point at most.
James Ragan (03:50):
Yeah, I mean I think you're right. I mean that was a surprise. I mean it reflects better than expected fourth quarter GDP, which that wasn't known when they last updated the SEP in December. And then the early trends in the first quarter this year have been above plans. So I think that that was certainly notable.
Gary Siegel (04:18):
GDP has been higher than projected for several quarters now.
James Ragan (04:25):
Yeah, again, one of the big surprises last year was that the second half of the year especially, it was much stronger than the first half for GDP and largely driven by consumer spending.
Gary Siegel (04:42):
Jerome Powell wasn't giving any hints yesterday about when he expects the first rate cut to come. What is your base case and how many cuts do you expect this year at this point?
James Ragan (04:54):
Yeah, so our base case is pretty much in line with the market. That's three cuts this year. I think the yield curve has kind of been pointed to that for a little while now. The two year yield is kind of in that ballpark right now. So that's still the base case for us. The timing because of the election year could come into play a little bit, I think even though Chair Powell didn't really commit to when that cut will be. I think it's pretty clear it's not going to be the May meeting, which is right at the beginning of May, or actually it starts on the last day of April. And so that means they have the June and July meeting, no meeting in August, and then September would be the last meeting before the election. So there's four more meetings before the election, but considering May doesn't look like it's going to be the start of the cuts, so it's going to be either June or July if they want to do it orderly and do it in 25 basis point increments. If they did June, July and September, that could be 25. That could be 75 basis points that could be done before the election. If they miss that June meeting, then I think that would suggest that there's probably only going to be 50 basis points of cuts prior to the election.
Gary Siegel (06:27):
And given the fact that they're being so cautious, 50 points would be off the table.
James Ragan (06:34):
Well, yeah, I mean at least at this point, I mean, I'll kind of go in line with Chair Powell who always talks about being data dependent. If you're talking about doing 50 basis points in one meeting being off the table. And so it would be if things really slowed, the economy slowed dramatically, that could happen. But we don't really see evidence of that happening, at least at this point.
Gary Siegel (07:09):
So James, the market seems to have enjoyed the report, it rallied the bond market rallied after the release. Is the market still happy with the report and what is the reaction today?
James Ragan (07:26):
Yeah, I mean I think we had a call this morning with some of our advisors and we talked about the Fed once again, lifting animal spirits. So I mean, I think there was a view going into, from an equity market perspective at least that Chair Powell could be a little bit more hawkish than he was. And so like I said, even though he acknowledged that there's a higher inflation month to month in January and February, felt like they're very much on track to the 2%. So I think the combination of the Fed being patient maybe for the right reasons because the economy is growing and they're not, even though the market expectations have changed over the last several weeks from having maybe looking at five or six rate cuts this year to now three in line with what the fed's been saying, that change has come because the economy is growing better than expected and could lead to pretty strong earnings performance still.
Gary Siegel (08:35):
So the summary of economic projections showed a big divide on opinions about rate cuts going forward In 2025, the range was from 2 75 to 5 25 for the fed funds rate, and in 2026 it was two and a half to 4 75. So next year there's like two and 2.5% difference from the top to the bottom and the following year also 2.5. Does this have any implications for future monetary policy?
James Ragan (09:13):
Well, I mean I think you can pull away a few things from that. I think the broad comment to start off would just be that's pretty far out still. And so I think you'll find that having a wide range is not that uncommon. A lot of uncertainty as far as where the policy might be needed by then. However, like you said, that's a pretty wide range. I think if you looked at 2025 and 2026, the high end of those ranges that you talked about a little bit of an outlier, I think there was maybe just one dot plot up at those levels. But I think it's probably more important to focus on the lower end of the range because those numbers are a lot lower than where we are now. And I think it does show an indication that many fed voters see a need for rates coming down to a neutral level that we're well above neutral right now.
(10:14):
And I think that aligns with the Fed commentary about inflation returning at 2%. So probably to me, it kind of tells me that the Fed does view the soft landing and scenario is more likely, so we won't go into a recession because GDP is tracking better than expected. And so I think that that's an indication that just more evidence that economy continues to kind of exceed what the Fed has been thinking. Even going back six quarters ago, even going back a couple quarters ago, we'll say that. And the last thing I'd say on that, just on 2025, the median number of rate cuts did decrease from four to three from what we saw in December for next year. And so indicates less confidence in linear improvement. I think Chairman Powell has talked about this a lot that it'll maybe be a little lumpier going forward. And so I think that a little more conservative view for next year might reflect that too.
Gary Siegel (11:29):
Yes, they have said that it won't be a straight line path. So what is your view, James? Do you see a soft landing for the economy? Are you expecting a recession?
James Ragan (11:42):
Yeah, so if you go back, I've been one of those strategists that was last year at least thought that every session was building feel. That is less the case now. And at this point, I think for this year especially soft landing is our base case, but I will say soft landing in our view is GDP growth. That's less than 2%, right? It's kind of maybe in that zero to 1% range. So we're trending well above that right now. So data's pretty positive and early 2024, the consumers are maybe slowing a little bit, but still in very decent shape. So right now the data is better than even a soft landing I would say. And so I think we do expect to see things start to slow a little bit in this year, but staying positive. But we don't think that that leads to kind of an all clear for 2025. We see a lot of risks in 2025 coming out of the election, so we don't see the all clear yet. In 2025, we've obviously got still the ongoing government deficit. We're going to have debt ceiling negotiations as the debt ceiling needs to be raised again, we'll have a new congress, perhaps a new president, and then we've got the end of a lot of sunset, a lot of the Trump tax cuts that could be extended, but that'll certainly be a challenge next year.
Gary Siegel (13:14):
So this is the fifth meeting where the Fed has held rates. Has the full impact of past hikes worked through to the economy yet?
James Ragan (13:25):
Well, it's interesting. Despite all the talk about the long and variable lags, it appears that the rate hikes that we saw from 0% to five and a quarter didn't slow the economy much last year especially, or early part of this year. And markets in general for most of that time haven't been too concerned. There's been a couple periods where there were worried about the high rates and obviously we've seen some impact in sectors like the housing market. So I think the conclusion being made right now is that it hasn't really, it probably has worked through the economy a bit, but I would say that interest rates do remain elevated. So even if the Fed, the Fed starts to cut, we're still going to see interest rates remaining above where they've been over the last several years. And so at the very least, corporations with debt maturities will need to refinance at higher rates. We have the same impact perhaps in the commercial real estate sector, and we're going to see the federal interest expense as a percentage of the budget continue to rise. So I wouldn't say that it's completely worked its way through the economy. I think that there are going to be impact of the higher rates that have to be dealt with, and it could create some volatility in markets.
Gary Siegel (14:56):
So inflation has come down in the past year, but still remains above the fed's 2% target in certain public appearances. Chair Powell has said that the Fed will need to lower rates before inflation hits 2%, otherwise they're going to be too late. What are the chances that the Fed will be late making the first cut?
James Ragan (15:23):
Well, so I think the longer the Fed waits, maybe those chances go higher. So I think very well could happen that the Fed could be late. We just talked about interest rates still are high relative to where they've been over the last several years. We know interest rates are still very much in restrictive territory, so we could see something break related to debt. Again, it could be a couple of things. I mentioned the commercial real estate or corporate interest expense. We could have venture capital financed companies having trouble refinancing some of their things, private equity related, we could see consumer delinquencies rise. So there's a lot of things that higher interest rates could negatively impact the economy on. And if you go back to the comments like you mentioned from Chairman Powell, he's been pretty clear that the Fed would prefer to see a slowdown in the economy versus a resurgence of inflation. So I think they're willing to actually wait longer and see things slow if there's a chance that inflation will rekindle. So I think that's going to be really important here in the next few months to see how that month to month inflation trend goes. And I think it's a fine line. Fed chair Powell talks about this all the time. I mean, there's risk on both sides if they wait too long or if they go too early. But I think he's willing at this point still to wait too long rather than cut too early.
Gary Siegel (17:03):
Yes, he seems to be very worried about another spike in inflation that would then cause them to need to raise rates, and that would really throw everyone off.
James Ragan (17:16):
And that's a lesson of the 1970s specifically because there were a few periods when the Fed started to ease and inflation came back. So that's why, and I think he's largely been vindicated. I mean late last year when inflation was really coming down rapidly, especially the PCE price index, there was some criticism that they weren't ready to cut sooner. But then when we saw the data spike in January, that kind of supported his position a bit more.
Gary Siegel (17:54):
So James consumers are still spending, which is partly propelling GDP at faster rates than had been expected. Do you see consumer spending slowing? And if not, what will cause an economic slowdown this year?
James Ragan (18:10):
Yeah, so I mean I think that is the big question. I mean, it's no surprise I guess consumer spending is two thirds of the US economy. It's an interesting period now because spending levels probably are slowing a little bit. I mean, we've seen some volatility in the retail sales. I know some past months were revised lower when that data came out last week. And it has been the driver, most of the driver and our view of the upside to GDP. But markets kind of expect consumer spending to slow a little bit. I mean, if we're in a soft landing scenario where GDP is less, if it ends up being less than 2% this year, which would be lower than the trends we're seeing already, I think that's kind of, the market knows this. And so I wrestle with if the consumer spending does slow, how much of a hindrance will it really be if it's in line with expectations?
(19:09):
So I think slowing consumer spending, but still staying fairly positive is not necessarily a bad thing. If consumer spending rolls over more dramatically than that, then that's going to be a problem. So we'll be watching the jobs data quite a bit. We'll be watching the wage growth quite a bit. One of the things that's been going on here recently, maybe it's reversed somewhat in the last few days, but gasoline prices are moving higher and historically that creates some challenges for consumer. So there's a lot of consumer data to watch. The other thing we'd watch is kind of the government spending still remnants of the pandemic response, a lot of government spending in the system, it was higher than expected last year really it did contribute to GDP growth and as in the second half of the year, it really came more from the state and local level on spending, not necessarily federal government spending. Now some of that could have been tied to money that was put out there during covid from the federal government that hadn't been spent yet. Some of it was tied maybe to tax receipts from 2022. And so we will see how that goes. But I think to see growth in government spending this year compared to high levels last year, that's not expected. So that might be a little bit of a drag as the year goes on. Again, especially on the state and local level.
Gary Siegel (20:44):
You mentioned the labor market and yesterday chair Powell was asked a question about the labor market and whether strong labor market would slow the rate cuts, and he said that they wouldn't and markets seemed to like that answer
James Ragan (21:05):
Very much so I think that was another, we were talking right off the top about reasons for why the market has rallied so strongly. I think that was a takeaway from the press conference yesterday. That was pretty important because the Fed has said that a weak labor market would probably accelerate the rate cuts, but like you said, a strong labor market wouldn't necessarily change things too much. So I think that was a takeaway and probably means that they're looking at the longer term trend. So what the labor market does over time is much more important. And if it did change a bit over was strong over a few months, couple months more, it's not going to impact their position too much.
Gary Siegel (21:55):
He also kind of hinted that there are good reasons why labor would be strong as opposed to bad reasons,
James Ragan (22:05):
Right? Yeah. And they're watching a lot of nuances in the labor market because it's not just the non-farm payrolls, I mean people returning to the labor force and we're watching on the labor turnover report, watching the amount of open jobs, watching the amount of quits and that type of thing. So there's a lot that goes into it. And the immigration issue now, which could be a very topical issue for the election this year, I think that that is helping labor supply and has maybe kept the labor market going better than it would have without that.
Gary Siegel (22:48):
James, the yield curve has been inverted for over a year, which many believe signals or recession is coming. So why does the economy continue to surprise forecasters and defy the doomsayers?
James Ragan (23:03):
Yeah, we call that the no recession recession, right in the post pandemic world. So I think one of the reasons why it's defied the doomsayers or the prognosticators is that we've been in this pandemic response now going on four years. So we had a force shutdown, we had the reopening surge that led to a massive supply chain disruption. We've had lots of labor market imbalances because people were discouraged and left the labor force or they were getting paid more to not work for a while. And then part of that was just the huge federal stimulus and then the monetary stimulus with taking rates to zero and then during the shutdown that surge spending on goods, consumer goods. And then since the reopening, we've seen the surge in spending on services. And so all of this is I think is still playing out. We're just at a place now in our view where some of the data is normalizing a bit, but not completely.
(24:10):
So it's made calling the economic twists and turns I think much more difficult. I think it's nearly impossible to forecast or exact timing of recession's anyways, but it's made it even more difficult. Usually the market would expects the Fed to cut rates because the economy is slowing. So that's kind of been why we've seen the interest rates do what they have, but we haven't seen the economy slow. But I'll also say that the Fed hasn't cut rates yet right now either. So maybe they do cut rates because the economy is slowing. That doesn't appear to be that like we talked about before, the base case today. And it seems like the Fed is willing to cut rates just to get back to a more neutral level, but perhaps it might end up being that the Fed is cutting rates because the economy is slowing. And so I wouldn't say that the story is complete yet.
Gary Siegel (25:13):
Very good. I'm going to take a couple questions we have from our listeners. First question is, do you think that the current strategy will create an overstimulation of the markets or will we see bubbles in the short term and long term?
James Ragan (25:32):
Well, so the current strategy, I'm not sure I exactly understand where they're going with that, but so interest rates are high, the Fed is in a pause mode. I know there was some talk about if inflation continues to tick higher that the Fed might have to raise rates again. I think that's kind of off the table after yesterday's meeting quite a bit. So I think by pausing the rate cuts, that's maybe going to become less stimulative. And I think the Fed has been given some cover just by how the economy is growing strongly. So in terms of, I'm not sure that the Fed policy right now by itself is what's driving the gains in the market. I think that obviously you could argue I guess today and yesterday post-meeting though like I said, it's lifted the animal spirits here a bit. But I think there's other things going on in the economy that if we are seeing a bubble in certain areas, you want to talk about generative ai, something like that that's more driven by just a lot of investment going on in the market. The concentration in some of the equities that happened last for most of last year, maybe early this year, we're seeing some of those magnificent seven stocks. They have been putting up pretty good earnings relative to the rest of the market. So there are some fundamental reasons why things have kind of been moving higher. But I think if the economy, if we avoid a recession and the fed's able to cut rates and just to get back to a neutral level, that's probably going to be good for equities to continue to move higher.
Gary Siegel (27:28):
And the second question from the audience, since the recent interest rate increases have not slowed economic growth very much, what do you think the neutral normal rate for the economy is?
James Ragan (27:43):
Yeah, I think that's a great question. If you just look at a normal neutral rate being a couple hundred basis points above the inflation rate or a less than that, I mean there's a lot of talk about that. I think the Fed has raised their neutral rate just a little bit here recently. I think they're kind of saying a long run of 2.6% or so. And so I think there's a lot of discussion about the Fed maybe tolerating a little bit more inflation longer term. So maybe that leads to interest rates being a little bit higher than what maybe people might've looked at a couple of years ago. Our view is that even in a good economy that we're going to have to see the yield curve invert and see the longer term rates move a bit higher. So we might be in a period here where interest rates remain higher. I think that's not too controversial to say interest rates are going to settle in at a higher rate than what we've seen over the last 10 years or so.
Gary Siegel (29:02):
So getting back to my questions, the presidential election is in November. The Fed in the past has tried to avoid the appearance of playing politics by not moving close to an election with most observers now thinking the Fed won't move until June or July, how will this impact the number of cuts this year?
James Ragan (29:28):
Yeah, I mean, I think it's a good point. Completely agree that the Fed is going to do whatever it can to not get involved in the politics of the election. There's always situations that come up where they have to do something, but if they can manage it, I think that they'll try not to get involved in the politics. I mean, we already know, and this came up in the press conference yesterday that the feds already received letters, at least two letters from Congress emphasizing the need for fed great cuts now. And so I think they will want to get things done before they get into the election. But we believe the September meeting, which I think is on the September 18th, it's far enough away from the election to still be a live meeting. So like I said earlier, there are four including the May meeting, there's four more meetings before September.
(30:28):
And so again, if they wait till July to make that first cut, like I said, might limit the number of cuts to two, which would be 50 basis points, but they'd have to do that then in July and September. And so that's kind of how we view the election. Now, if economic data were to roll over and get particularly negative anytime from say, August up to the election, then the timing and the number of cuts could change. I mean, historically the Fed doesn't always do 25 basis points at a meeting. And historically when the economy really starts to slow, they don't even follow the meeting schedule. Exactly. They, they'll call special meetings to do that. So I'd throw that out there as a wild card, but I think the Fed is not going to want to be accused of helping one party or another. So I think that's why we think that June is likely more of a live meeting than other people think because if they do it, if they do a cut in June, that just gives them a little bit more flexibility heading into the election.
Gary Siegel (31:39):
But you don't think they would delay anything until November or December meetings?
James Ragan (31:45):
I mean, you could make the argument that if they really want to do, if 75 basis points ends up being the number for this year, wait, they could do 50 basis points before the meeting and then just hold one for the fourth quarter. I think that's possible, but again, because of the election, they'll want to have more flexibility. And so that's why June makes sense to us.
Gary Siegel (32:16):
Very good. So what are the biggest risks to the economy going forward at, you say, I mean, I know there are some that are unseen and those are the bigger problems, but what risks do you see the economy going forward?
James Ragan (32:31):
Yeah, I mean we touched on 'em a little bit already, but just from, I think the Fed is to focus on the jobs market. Like Chairman Powell has said, if they do see jobs start to weaken quite a bit, that would prompt faster rate cuts. That's the biggest risk, I think, is that you could see the jobs market start to roll over. I wouldn't say that's necessarily the most likely risk, though it might be a bigger risk, the biggest single issue risk, but the data right now is still pretty strong. We saw jobs growth in the, if you just looked at the three February, the last three months, average job gains were greater than what we saw in the fourth quarter, even with some of the lower revisions that we saw. So other than jobs, it goes back to what we also touched on a little bit before, just on the debt side, commercial real estate we could see, could see isolated banks having problems. We had one recently tied to some of their real estate holdings on the multifamily apartment side in New York City, there's a lot of private lending out there, a lot of venture capital debt that needs to be refinanced. So we could see something break in that system if a large company got kind of caught up in that, that could create some volatility in the market.
(34:03):
And I'll also talk about the federal treasury issuance last summer, August or so when the treasury released their refunding requirements and it was higher than expected for the third quarter, interest rates moved quite a bit higher on that news, financial markets dropped, and I think it just highlighted the annual deficit that we continue to rack up. And then the fact that interest costs are moving higher now as they got in the fourth quarter, the issuance turned out to be a lot less than expected, and that continued in the first quarter as well. But I think that that's something that because we're continuing to run the deficit, we're going to have another quarter here down the road probably sometime this year where the treasury issuances is again higher than expected. And so I think that that creates, that just highlights the fact that the interest expense rising could crowd out other government spending and that could weigh on markets, but could also weigh on the economy as well.
Gary Siegel (35:16):
So we have another question from our audience. Without a deflation in prices, consumers will be facing higher prices for the go forward. How long do you think it will take for consumers to permanently adjust and in which sectors will they pull back from the most?
James Ragan (35:36):
Yeah, I mean, that's a good question because I think that that's the disconnect between some of the data which is improving and still the consumer confidence, which is fairly weak or at least how consumers feel about where the economy's heading. And that's exactly why, because even though inflation is coming down, if you go back over the last three years, most things are 20 to 30% higher and consumers on some level are adjusting to that, but not fully. One thing I'll say is that for most of that time over the three years, the wage growth was lower than inflation. So the real purchasing power was eroding. But that has flipped and it actually flipped about eight months ago or so. So we've had I think eight consecutive months of if you just look at average hourly earnings growing faster than inflation, so real wages are growing, again, if that continues, then consumers over time will start to feel better.
(36:47):
But I think what the areas that are most at risk, some of the big ticket purchase items could be at risk. We could see, and then we've seen this kind of surge and spending on services, a lot of travel related. So we could see that start to pull back. I mean, it wouldn't take much for consumers to pull back just a little bit because their confidence starts to erode that that would start to slow the economy. So I think it is a risk and it's a fine line because like I said, the real wages are growing. I don't think we're going to get to a point where prices for many things start to fall, so it'll just take times to where consumers feel a little bit more comfortable with the higher prices. I'll say on the mortgage market, like a housing market, we're looking at 7% mortgage rates or so right now, you could have mortgages, were closer to 3% just a few years ago.
(37:52):
And so that creates, makes housing much less affordable for the average new homeowners. Home buyers especially, I think consumers can adjust to the higher rates. I think those of us that are older took out mortgages at much higher rates in our early lives, but it just means you're going to have a higher monthly payment, probably put more in the down payment so it could delay the recovery in the housing market. And so that would be one of the areas that is not only impacted by the higher prices, but by the higher interest rates as well.
Gary Siegel (38:28):
Yeah, I think when I had my first mortgage, the interest rate was around 10%. So what questions are you getting from clients, James? What are they worried about?
James Ragan (38:40):
Well, most of the questions we get are on the equity markets. I get questions about will the market concentration continue? So I touched on this just briefly a few minutes ago. Our response to that is just kind of, we do prefer investors start to broaden their exposure if they have been lucky enough to participate in some of these magnificent seven gains, which are in so many portfolios, you don't get out of those stocks, but you do maybe trim them when they get too, and the weighting gets above tolerance. And so just look to broaden out the equity exposure.
(39:22):
Customers are asking us investors, what sectors do we like right now? That's a common question. I think with the economic data coming in better than expected, it favors the cyclical stocks. And I think we're seeing less participation from some of the defensive sectors like staples and utilities, even though they lag last year. I mean, I think we want to look at materials are doing well right now, financials, energy, some selected industrial. So we just want to pay attention to making sure we have good quality diversified portfolios that are and have exposure to those cyclical sectors. We're also getting questions about small cap stocks. If you just look at the Russell 2000 index, it really has lagged the market going back for multiple years now. We've seen fits and starts this year, but I think largely lagging. And so if we are going to avoid the recession, small cap stocks should do okay, but we'd stick to very high quality profitable companies, pay attention to where the debt maturities are because of some of those refinancing risks that we talked about earlier.
(40:39):
And then the other two areas or a few areas, people are still worried about inflation. That kind of ties into that last question. So even though inflation is improving, prices are much higher, people are worried about the election and they're worried about global growth. So one of the big debates right now is Europe versus China. Europe seems like it's maybe exceeding expectations a little bit on the GDP side, whereas China has continued to disappoint. And so companies that have European exposure might be doing a little bit better than expected this year as companies that have the China exposure, that might continue to be a headwind here for a while.
Gary Siegel (41:26):
And what does all this mean for the bond market?
James Ragan (41:31):
Yeah, I think the current expectations clearly by the Fed direction is that shorter term rates will move lower. Although, like I said earlier, I think the two year treasury yield at six, 4.6% or so is already kind of in line with that Fed funds estimate. The shorter term bonds are yielding well above that one year and less so we would expect the rates to move lower as the fed moves. So that could be probably means that investors might stay a little shorter term in their duration. But in a soft landing scenario, like I said, we do expect the yield curve to invert. So to us, that means the 10 year yield should move higher from its current level of 4 25 to four 30, and maybe it gets back up to four and a half percent or higher. And so that might not be as attractive part of the market as that process happens. So again, we will probably see investors stay a little bit shorter on the curve still for the bond market.
Gary Siegel (42:51):
Very good. I'd like to thank my guest today, DA Davidson, director of Wealth Management Research, James Reagan. I think you did a wonderful job, and I'd like to thank our audience for tuning in until next time. Thank you.
James Ragan (43:07):
Thank you so much. Have a great day.
