The Federal Open Market Committee cut the fed funds target again in December but signaled fewer cuts in 2025. There was some dissent. The markets are watching to see if the Federal Reserve pauses its easing cycle in January. Join us at noon, Eastern, on Jan. 30 as Brian Rehling, head of global fixed-income strategy at Wells Fargo Investment Institute, recaps and parses the previous day's FOMC meeting and Fed Chair Jerome Powell's press conference.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Gary Siegel (00:10):
Hi, and welcome to another Bond Buyer Leaders Event. I'm your host Bond Buyer managing editor Gary Siegel. Today we're going to discuss the Federal Open Market Committee's meeting and monetary policy. My guest is Brian Rehling, head of Global Fixed Income Strategy at Wells Fargo Investment Institute. Brian, welcome and thank you for joining us.
Brian Rehling (00:36):
Yeah, great. Thanks for having me.
Gary Siegel (00:38):
So I just want to say to the audience, there will be no q and a session. If you have any questions, feel free to type them in the q and a queue at any time. Brian, was there anything in the FOMC statement or Powell's press conference that surprised you or grabbed your attention?
Brian Rehling (01:00):
Well, when I first read the statement, they had taken out the reference to making progress on inflation. Now Powell kind of cleared that up in his press conference, basically stating that wasn't something new, wasn't meant to deliver a message, was just kind of cleaning things up. But that kind of was the first thing that stuck out to me when I first read the statement. That said, everything else pretty much went as expected and really not a lot of surprises, no surprises really as expected at that meeting. That was a meeting where we did not get a new summary of economic projections and so we just had to go off of parsing the statements and Powell's words.
Gary Siegel (01:47):
When we last spoke, you said you expected one cut this year. Is that still the case and if so, why or why not?
Brian Rehling (01:56):
Yeah, I still expect one cut this year wouldn't surprise me if we don't get any. I think it's going to be difficult for the Fed to do more than that one cut. It's getting that one cut kind of questionable honestly. And really it just comes down to the economy. The economy is doing better I think, than the Fed expected than most people expected. As long as the economy's doing well and inflation isn't dropping towards their 2% target, there's really no need for the Fed to cut rates. Now, if we have some type of unexpected shock in the economy, unexpected events that would cause the economy to slow at a faster pace, maybe bring up unemployment, things we don't see happening now, then of course the Fed more fed cuts are back in play, just not our expectation right now.
Gary Siegel (02:52):
You also said you expect the Fed's importance to the market will diminish in 2025. Can you explain what you meant by that and why you think that way?
Brian Rehling (03:02):
Sure. When we were in the second half of 2024, I mean everybody, equity investors, fixed income investors, the entire market, absolutely laser focused on the Fed. When are they going to cut? How much are they going to cut? Every single data point seemed to move the market based on if the Fed was going to cut or not going to cut. Of course, we had the 50 basis point cut in September and subsequent 25 basis point cuts market. It just seemed to move on any little information related to what the Fed may or may not do. So now I think we're in a phase where the fed's more likely to take a fairly long pause here, economy doing relatively well. Inflation seems to have stalled out a bit in terms of dropping towards their goal. And so each data point to me is not as important to markets as it was in the second half of 2024 just because I think the bar now starts to increase for the Fed to kind of let's say restart rate cuts at some point in the future. So again, I just don't see the market fixating as much on every little data point in terms of what the Fed may or may not do and that moving markets as much as it did in the second half of 2024. So when I say the Fed maybe not as important for the markets in 25 as it was in 24, it's really that piece of it. Obviously the Fed's still very important. What they do is important. I just don't think they're going to be doing a lot for a while,
Gary Siegel (04:44):
And it would be the Trump administration's policies that will drive markets?
Brian Rehling (04:52):
Well, I think that that is definitely what markets have reacted to since the election, really since mid-September. If you look at the low in the 10 year yield that's been rising since mid-September, markets had a pretty good clue at that point who was likely to win and the election just kind of continued that trend. So a lot of the policies that were laid out in the campaign are known, but how they may be implemented I think is a bigger question mark for fixed income markets and markets in general, especially those that may be more inflationary type policies such as tariffs. We didn't see tariffs implemented on day one, but we continue to see them put out there with deadlines approaching quickly when tariffs may be put in place, at least a first round or may not, is it a negotiating tool? Is it actually going to be implemented, et cetera.
(06:01):
So some of that uncertainty is still out there. How that develops yes is going to impact markets. Of course, the debt and the deficit, that's kind of been a known quantity for some time. We do have debt ceiling. We know that Trump wants to get rid of the debt ceiling, whether he is successful or not, we'll see, and we know that the tax cuts expire, those certainly will be extended in some capacity. How big, how much additional tax cuts, how that looks at the end of the day, again, a question mark for that. Markets will have to wait and see how those policies develop. Now we know deregulation is likely going to be a positive for businesses. So again, there's some known there's some unknown, and yeah, we're going to have to wait and see exactly what the details are. I guess in some cases the devil's in the details, and again, as long as the economy is operating at a good pace, we will see how those develop in markets will react accordingly, I think.
Gary Siegel (07:09):
And how will deficits, debt and the debt ceiling discussion impact the fixed income markets?
Brian Rehling (07:17):
Yes, I mean we've seen the debt ceiling. We've seen this playbook many times. The first time or two, it had a much bigger impact than more recently because again, the market kind of knows the playbook here. Ultimately the US government is not going to default on its debt. Now in terms of abolishing the debt ceiling, personally, to me that makes a lot of sense because again, it's a manufactured crisis. The government doesn't spend money that the government doesn't authorize it to spend. So the debt ceiling is just giving the government the ability to borrow, to pay for that spending that they've already authorized. So let's get rid of the manufactured crisis. Now whether that's successful or not, but we don't know if you really want to focus on reducing spending then have the government not authorize that spending. It's pretty simple, but again, parties in power love to get benefits to their constituents.
(08:19):
It's a lot easier to give things than take things away. So again, we have a single party in power and tax cuts are a form of giving things away at spending. So my expectation is that we could see some projections of lower deficits out in the long run once you get past the next four years. But probably with this go around, I'd be very surprised if we see a lot of spending reduction. I know there's the DOGE, the focus on cutting some of this unnecessary spending, but the reality is the vast majority of the spending comes from entitlements comes from military spending and there's just not going to be a lot of appetite to reduce or cut those benefits or reduce that spending. So in an ideal world, what we will see is we'll see the economy grow at a faster rate than the debt goes.
(09:32):
The debt grows. I mean, I think it's unreasonable to expect that we're going to be cutting the deficit and start making progress on that, but if the economy just grows at a faster rate, you start to make some progress again in your ability to pay that off. So it's worth noting and watching closely I think for bond investors to see exactly how this all develops over the course of the year. Again, my expectations, we're not going to see any monumental shifts here, but we've got to remember the us, the biggest, most diversified economy in the world, quite frankly, it's operating much better than most of the other economies in the world and the dollar is doing quite well. So I don't think we're going to have this crisis where there's essentially a buyer strike, were forced into austerity, et cetera, that some bondholders clients, especially investors, some of their worst fears are around the debt ballooning. And I mean we know all the things that go with that potentially. So I just don't think that's probably in the cards here over the near term. But again, for bond investors, it's very important to watch and just see how these things develop. Yes.
Gary Siegel (10:58):
What is your estimate of the neutral rate, Brian?
Brian Rehling (11:02):
Well, I mean this is a trick question because nobody knows the neutral rate. Of course, if we did, it would make monetary policy much easier. That said, let's take a look like the Fed. If you look at what their longer run projections are, 3%. So I guess you could say the Fed thinks the neutral rate is 3%. It's probably a bit low in my estimation in the current market, maybe the neutral rate's three and a half, 3 75, somewhere in there. But again, this is a moving target and it's impossible to say exactly what it is. But clearly over the last couple of years, especially with the Covid policy, the fiscal policies, I think the neutral rate has definitely risen here in the us. I think that's clear, and we're talking somewhere between three and 4%. I might be more in the middle to upper end of that, and the Fed's probably more in the middle to lower end of that.
Gary Siegel (12:04):
Fair enough. So Fed Chair Jerome Powell has said he won't anticipate fiscal or trade policy. Is the pause an indication that this is what they'll do, or at some point you think the Fed will need to become proactive and anticipate potential implications on monetary policy?
Brian Rehling (12:25):
No, I don't think they'll anticipate. I believe them when they say kind of they're going by the data now there is uncertainty and you just can't get away from that uncertainty, but to react prematurely to it, I don't think they will do that because a lot of these things you talked about kind of trade policy, even immigration policy, et cetera, it's, it's still unknown how it gets fully implemented. And of course then it's flowed through into the economy. So unless we start to see inflation actually start to move higher, the Fed has no reason to kind of switch its stance which is neutral to lower on its interest rate policy and to move lower, like I said, we need to see one of two things. We either need to see a deterioration in the economy, an uptick in unemployment. I mean obviously those two kind of go together or you need to see some real progress towards that 2% goal. From this level, you see one of those two things. I think you see the Fed slowly continue to cut rates after what I think will be a more extended pause, but I don't think there's any reason here for the Fed to anticipate the impact. And there's also no reason for the Fed to do much here other than kind of just wait and see. Just because look at their two metrics, employment, price, stability, neither of those really suggest they should be doing anything. Definitely probably pause here appropriate.
Gary Siegel (14:03):
Yeah. So yesterday when asked, Powell said that the Fed would not change its 2% inflation target. How serious is the Fed about hitting the 2% inflation target? Would two and a half be enough? Would two and a quarter be enough? Do you ever see them accepting a slightly higher level at this point?
Brian Rehling (14:27):
Right. I mean obviously they said they're strongly committed to the 2%, but that tends to be, I think how they think is an average over time. So if you're a little above, that's fine. I mean there were obviously many years we were below that 2%, right? So over time the 2% would they tolerate two and a half, two and a quarter? I mean, if it's stable, if the overall, you got to kind of balance the two objectives. So if you got close to full employment and two and a quarter, two and a half, but in their estimation, if we raise rates or keep rates higher cause inflation to try to get inflation to move lower, but it really impacts the employment market, then that's probably not something they're willing to going to be willing to tolerate given their two mandate, their objectives. So I think it's a bit of a balancing act, two and a quarter, two and a half. I don't think they're going to fret too much about, but again, you've got to think of this over the long run. So this is an average over a long period of time, but the Fed is not going to come out and say anything. Then they're strongly committed to the 2% and I don't think they're going to let it get far above that 2% objective over time.
Gary Siegel (15:52):
So the Fed is confident inflation is moving to 2%, yet the potential remains for higher inflation this year depending on what the Trump administration does. You've said that you expect one cut this year or maybe none. What are the chances the Fed will need to raise rates this year?
Brian Rehling (16:11):
Oh, it's possible, right? I mean, if you start to see inflation move higher and the economy is still doing relatively well, the Fed might not have a choice. Hopefully we don't get to that point, but in the second half of the year, that's something to watch for and we definitely need to see inflation at least remain stable. If we start to see that move higher, I think it will bring rate cuts into the potential picture. So I don't think it can be ruled out, no.
Gary Siegel (16:42):
Do you see a soft landing for the economy, Brian?
Brian Rehling (16:48):
Listen, the economy's doing quite well. So if you think back a year ago, everybody's waiting for the recession, waiting for the recession, it never came waiting for the soft landing. It never came, right? So I think things are going to be relatively good this year. Well, we see maybe a little bit of a slowdown in economic activity potentially, but I don't think we see anything significant at this point. Obviously shocks can always happen to the system. That kind of can change everything quickly, but as things as we sit here today, if it's a soft landing, it's going to be real, real soft in my estimation. Just don't see the weakness really in the labor market as long as the labor market remains relatively strong, people have money they're willing to spend, and the economy kind of continues to churn along. And I think the economy's resiliency really has surprised the Fed and surprised a lot of other market watchers over the last year.
Gary Siegel (17:50):
Yeah, it's been difficult I think since the pandemic to predict anything ...
Brian Rehling (17:56):
Things have just again, have done really, really well and we had this inverted yield curve for a long time, which typically foreshadows a weaker economic activity and it just hasn't. I mean, kind of everything. Surprised I point all back to the labor market, which again still seems relatively strong as long as people are confident in their jobs or confident they can find jobs they're willing to spend. And obviously we're a consumer driven economy, and if people are spending, the economy is going to keep doing well. So will it last forever? No, at some point all these covid dislocations will probably catch back up to itself, but for now just don't see it. So you kind of have to show me at this point because people have anticipated for a very long time and it hasn't happened, so now we have to wait and actually see it rather than projecting it's going to happen.
Gary Siegel (18:55):
Have you lost faith in the yield curve inversion signaling a recession or do you think this was a one time only occurrence?
Brian Rehling (19:05):
I mean, we had it back in the sixties too where we inverted for a number of years that came out of it with no recession and then inverted. I tend to think again because of all the dislocations we were just talking about, that it is kind of a one-time miss, albeit a fairly big miss for the yield curve. I will continue, I think to believe in the yield curve going forward. We're back into positive territory again, foreshadows pretty decent economic activity this year. If we saw a big inversion, again, I'd be inclined to think it is foreshadowing a recession. I do again think it's kind of a one-time miss, mainly due to a lot of the dislocations due to covid.
Gary Siegel (19:57):
So last week, President Trump said before the World Economic Forum that he will demand lower interest rates. Yesterday, Chair Powell didn't really address that, but said, we'll just keep our heads down and do our work. What do you make of Trump's statement and how do you think that plays out?
Brian Rehling (20:22):
Well, of course there's no doubt that Trump would like lower interest rates. It's better for economic growth, it's better for the debt, and the deficit rate was to spend less money to fund that debt and deficit. Now it's not so good for inflation, and Trump of course ran on keeping inflation low. So there's a bit of conflicting message in that sense. I think the president is confident that he has the toolbox to keep inflation under control. They could get much more difficult if the Fed is lowering rates when things are going quite well and they shouldn't be. And I think there's just this, I mean we saw this all during his first term. There's this natural combativeness a little bit of what he wants and what kind of the reality is as it stands, the Fed is kind of an independent organization. Of course, the members get appointed by the president.
(21:26):
I don't think he has much ability to go in and fire the chair, nor probably would he when it caused that type of disruption. Quite frankly, Powell's term is up in I believe, may of next year. So between now and then, I don't expect, other than maybe the president jawboning, I don't expect a lot of impact on the Fed from his statements, his comments, where it gets a little bit more interesting I think, is if he is still of the opinion and that rates need to be lowered, maybe the Fed isn't doing what he wants when it's time to appoint a new chair, because at that point it could become a little bit more political. He could put someone in more favorable to his positions. And if that were to occur, I think that should concern bond investors a bit because bond investors are very well served by an independent Fed and a Fed that is focused on that price stability mandate.
(22:33):
If we get some leadership in there that is less focused on price stability, more interested in economic growth, getting rates down at any cost, that will be more problematic. Now that's a long time away. So I prefer not to speculate or worry too much about something that is a year and a half away, maybe not quite that long, but 15, 16 months away. So we'll see at that point who the president actually appoints, and if that is consistent with kind of a more political slant on the Fed or really if this is just his normal jaw boning. We saw this all through the first administration, so this is nothing unusual. We got through the bottom market, worked through the first time with these, call it somewhat mixed messages or the jaw boning without problems. So again, I wouldn't make any investment decisions on that, wait until we see kind of card, hard cold facts and appointments rather than just jawboning positions.
Gary Siegel (23:52):
Well, I'm going to ask you to speculate. Trump and Powell have had a contentious relationship some, and Trump talked about firing him. Then he retracted that and said he wouldn't renominate him. But you think there's any chance that Powell gets renominated?
Brian Rehling (24:17):
Probably not. I don't know that Powell would want to be renominated. I mean, maybe he does, maybe he doesn't. I don't know, but I suspect the president will want to put in his own nominees when the time comes. Now, who he puts in, that's the key, right? I mean, if it's an ex-Fed president, maybe Bullard or I mean, I don't know. I think that there's not too much to worry about there. If it tends to be somewhat outside of the Fed system, someone that has a stronger political stance, that would be what would be more concerning to me. Someone that again, is kind of bringing politics into the Fed rather than letting the data chart the course.
Gary Siegel (25:12):
Trump will get to name two governors in the short term. How much of an impact will this have on monetary policy?
Brian Rehling (25:22):
Probably not a huge impact, honestly. I mean, two governors are not going to swing the votes. We saw the last vote was unanimous the vote just yesterday. So it's not going to swing policy that much, quite frankly. Now can have some impact is on the regulatory front, things like that. Some of the other things the Fed does besides setting rate policy. But in terms of rate policy, I don't see a big impact there from two governors.
Gary Siegel (25:56):
Will President Trump be able to erode the Fed's independence in any way? And if so, how will that occur?
Brian Rehling (26:05):
Well, the way it's set up and the way the terms are set up, I think it's unlikely you're just going to have a hard time getting, even if you go the political route, you're going to have a hard time getting enough of stacking the deck, if you will, to make a big impact. I think the biggest impact comes from the chair and how that nomination goes. Again, it's my hope that the Fed does not become political. If it becomes political, I think that is a problem for especially bond markets. I mean, it might be great for equity markets, you drive the economy, lower rates, all those things get equities go up. But to me, it's a big problem for bond investors who, especially intermediate to long-term bonds, what you most care about, quite frankly, other than getting repaid, the credit risk is the purchasing power.
(27:00):
So if you start to have fears or there is a chance that you are not going to be committed to that inflation goal, then it becomes much more risky to own intermediate and long-term bonds. Thus obviously you see those rates likely go higher even if they're lowering short term rates, right? So you could get an extremely steep curve. Again, generally good for the economy in the short term, good for equities. But that would be what would concern me. Again, it's still I think a strong possibility and a strong likelihood that the president will not make the fed overly political. But if it does end up going that route, that would be something that would concern me. But I'd really watch for what happens again around next March, April, may, when you have to have a nomination to replace the current chair.
Gary Siegel (27:57):
We have a follow-up question from our audience. If the Fed were to lose the perception of independence, what do you think happens to the markets?
Brian Rehling (28:07):
Yeah, again, I just repeat what I said. I think equity markets, risk markets, I think they're going to be fine. I think they'll actually do quite well, at least over the near term. But bond markets, especially intermediate and long-term bonds, you would have to have a much higher term premium there to compensate for the risk that the Fed doesn't adhere to its price stability goal anymore.
Gary Siegel (28:33):
We spoke a little bit about the budget and the federal deficit is at all time highs, and you said a lot of the spending can't be changed. Where do you see the deficit going in the near future? Do you see it going much higher, a little bit higher, a little bit lower?
Brian Rehling (28:52):
Yeah, it can't be changed. I mean, it can be changed by Congress agreeing to it and the president agreeing to it and passing the laws and everything. But the reality is I don't think there's much of any appetite to change at the current point in time. Any of the big spending items, which of course are entitlements and defense, there will be a focus on some of the other discretionary items. But again, it's a very small part of the budget, got to pay the interest. That's becoming a bigger part of the budget as well. So it's just not that much discretion, not much they can do there, unless they're going to turn some big boulders over that, I don't think they will. So what do I think is going to happen? I think they will again try to and likely keep the deficits relatively stable. I don't think we'll see a lot of new spending.
(29:54):
In other words, when they find new tax cuts they want to make, they'll find some spending to offset it, right? Kind of net zero. But that will continue to grow the debt. I mean, it just will. And again, I think what the focus should be realistically is seeing the economy grow at a faster pace than the debt grows. And then over time you can again make those payments on your debt easier and easier so you can work your way out of it over long periods of time. But I don't see any, I think it's probably a lot more talk than actual action we'll see put into place that, again, really move the guardrails here. I mean, cutting 50 million here, a billion there, 10 billion there, a hundred billion there. It doesn't change anything, right? It just doesn't move the needle. Again, I just don't think there's any appetite, especially with the super thin margins in really the house and the Senate both to take a swing at where you can really move the needle, which would be in the entitlement programs.
Gary Siegel (31:14):
How have market fundamentals shifted since the Fed started cutting rates and where do they go from here?
Brian Rehling (31:21):
Well, when the Fed started cutting rates, there was a real concern that we were going to go into a recession. We saw inflation coming down rather quickly at that point, and the election outcome was uncertain. Since then, the economy has done much better than I think anyone expected. We have seen inflation stall out rather than continue to fall, and we have a president that was elected that has some potentially inflationary policies such as tariffs and immigration that he looks to put in place, and also more kind of business friendly policies such as lower regulation tax cuts or an at least extension, if not lowering taxes that tend to be positive to the economy. So you have these positive economic variables. You have these variables that have the potential to increase inflation. So the fact that the Fed now is pausing makes a lot of sense in that context to me. So it doesn't appear that we're headed for a recession, doesn't appear to me that inflation is going to continue on its trajectory lower again due to those market dynamics that have changed. So
Gary Siegel (32:55):
What are the biggest risks to the economy?
Brian Rehling (32:59):
Well, I mean the biggest risk always is the unknown, difficult to quantify, but I mean, if you go back through history, there are unknown events that crop up quickly that can have massive impacts on the economy. That's always the biggest risk. But again, can't really position portfolios around an unknown and an unknown timing, or you can get yourself in a lot of trouble, as I imagine many people have been positioned for recession over the last couple of years that never materialize. Now, if we take a step back, what else? Inflation of course. So if tariffs or immigration have a much bigger impact to the economy than perhaps expected, we start to see inflation move higher. That could have some detrimental effects. And then anything else that can impact unemployment? Again, unemployment has remained relatively stable. I don't see a lot of fear about jobs or not being able to find a job out there.
(34:14):
Anything that could lead to those types of fears, of course would likely bring a recession back into play. So it's kind of the normal things that economists would watch for. Again, some of these new policies, how they're implemented, again, something to watch for, but always it's likely to come from where no one's looking. And if there is that type of unexpected event, I think you have to react quickly because I don't think we're still, we're the government's over-leveraged, individuals are over-leveraged a lot of leverage in the system. I mean, it works great for now when things are going good, people can pay their bills, people spend, et cetera. But if there's some type of shock that impacts those abilities or causes people to pull back, things can unravel quickly. Again, not our expectation, but that's to me what to watch for.
Gary Siegel (35:14):
What does all this mean for the bond market?
Brian Rehling (35:19):
Yeah, I mean for the bond market, it means to me that short-term rates probably aren't going much lower. Probably where they're at, maybe get a little bit, but again, what you see is what you got. The bigger risk to me comes on the long end, but only to an extent because I mean our target for 10 year yields at the end of the year, four and a half to 5%. It's well above kind of where most of the rest of the street is. But again, if things are going well, I think rates will stay up there. And quite frankly, markets and the economy have shown they can tolerate it. I don't think four and a half at this point is causing markets much angst, not causing the economy much angst. We seem to be doing okay, but I think if rates for inflation or for other reasons, if they start to move above 5%, I think it's going to become a little bit more difficult for the economy to tolerate that.
(36:17):
So for that reason, I think we're going to have a hard time getting a lot above five. I mean, I'd be a big buyer of duration if we got around 5% or a little above on the 10 year, just because I don't think the market can tolerate much more of that. And as soon as we start to see the economy rolling over, what are people going to buy? They're going to come back and buy. They're going to buy duration, they're going to buy high quality, et cetera. So again, you kind have this give and take there. Here at the four and a half level, it seems about fairly valued to me. I don't get too excited about going and adding a bunch of duration to the portfolio. I don't mind sitting in short, intermediate term bonds. I mean intermediate, you get a little bit of, you can move up the curve a little bit, get a little bit more yield.
(37:05):
Seems reasonable to me. We all know credit spreads are very tight, but again, as long as the economy is doing well, they'll stay tight. So again, it's hard to avoid those parts of the market or you start losing performance relatively quickly. So again, happy to kind of continue to have that credit exposure, not excessive, but have it. And then for clients, investors in high tax brackets, of course, muni bonds always makes sense. Get a little bit better credit quality there. And again, if you're making the taxable equivalent yield, if you're doing that calculation high tax bracket, you're probably coming out ahead. So that's how I would play it. Short, intermediate for now, if you get those spikes in long-term yields, ad duration, and kind of continue to hold credit risk until something in the economy tells me.
Gary Siegel (38:06):
We have another question from the audience. In hindsight, should the Fed have really started lowering rates maybe in the second quarter or third quarter of 2022?
Brian Rehling (38:16):
I mean, I think if they could go back and do it again, they would've lowered at the July meeting rather than kind of doing 50 at September, just do 25 on a continual basis. But they didn't. They wanted to wait for some more data and they had to do 50 in September. But yeah, I mean in hindsight's 2020, I think if they could go back and do it again, we just space it out a little bit better than starting with 50.
Gary Siegel (38:45):
So what questions are you getting from clients? What are they worried about?
Brian Rehling (38:50):
I mean, probably the most, we get a lot of questions on the debt and the deficit they're concerned about. That, again, makes a lot of headlines. But quite frankly, if I think back past, over the past five or 10 years, they're always concerned about the debt and the deficit. So this isn't a new problem. Maybe it's a bigger problem than it has been in the past. It'll probably be a bigger problem next year than it was this year, et cetera. But this is not a new problem. And so again, important to counsel clients through that this isn't some unique time and point and not to have this disrupt your investment philosophy, investment goals, investment portfolio, construction, et cetera. Always get client questions on the Fed, what are they going to do not do? But again, I'm seeing those diminish relative to the fall of 2024, as I think everyone is slowly getting on board here that the Fed likely just going to take a pause here for a while, but by and large, fixed income investors have had a rough go of it over the last several years as interest rates kind of came off.
(40:06):
That zero level just scraping out gains while you watch the equity market go up and up and up and up. And quite frankly, we are still positioned on the equity side, we're overweight equities, we think that probably has a little bit more room to run. Again, that disparity between equities and fixed income, especially a fixed income continues to rise up towards that 5% level. But this is the point I'm making with a lot of clients. It's not going to be as bad going forward as it has been in the past. So automatically starting just in treasuries, obviously in corporates and other areas, you're starting higher just in treasuries, you're starting around 4.5%.
(40:52):
And so that provides a lot of cushion. So even if rates continue to rise well over a 12 month basis, I got four point a half percent of cushion just in treasuries. And you're going to get more in those credit sectors just to kind of cushion the blow, which would keep you positive. And if we do have that unexpected event, we do have that shock, those risk off periods in the markets, well, rates are going to move, likely going to move lower, and you could be into double digits pretty quickly. Could be actually doing better than our friends over on the equity side. And I think that point will come. I'm not so sure it's this year, but that point will come. So clients need to stay diversified and be prepared if the unexpected happens or when those periods of risk off in the market comes. So again, a lot of just counseling clients talking to clients that the future for fixed income returns definitely looks brighter than what we've experienced over the last 3, 4, 5 years.
Gary Siegel (41:59):
Well, we're running out of time, so I'd like to thank my guest, Brian Rehling, head of Global Fixed Income Strategy at Wells Fargo Investment Institute, and I'd like to thank everyone who tuned into listen to us today. Have a good afternoon. All
Brian Rehling (42:13):
Great. Thanks, Gary.
