Displaying items by tag: rate cuts

The Fed’s recent rate cuts are reshaping the landscape for fixed annuities, bringing both challenges and opportunities for investors. Fixed annuities, which offer guaranteed returns unaffected by market fluctuations, remain steady for existing contracts but may see reduced rates for new purchases in a lower-rate environment. 

This could lead less risk-averse investors to consider alternatives like variable annuities or registered index-linked annuities for potentially higher returns. Despite these shifts, the core appeal of fixed annuities—income guarantees and stability—remains intact, making them valuable for conservative financial strategies. 

Rate cuts, while altering some dynamics, do not diminish their long-term benefits, such as tax deferral and customization for individual goals. 

Finsum: Advisors need to be aware of how the different annuity structure is affected by the various interest rates cycles, in order to serve clients. 

Earlier this year, PIMCO cited expectations that the Fed would start a series of rate cuts as one of its reasons to be bullish on fixed income. The asset manager is revising this view given the lack of progress on inflation and now sees rate cuts being delayed until the end of the year or even into 2025.

Following the latest FOMC meeting, PIMCO sees the Fed pursuing a policy similar to the 1990s, when the Fed held rates and allowed inflation to trend lower over time. Fed officials seem wary of the downside risks of further tightening and are willing to concede higher inflation in the near term. 

Despite a recent uptick in inflation, the Fed seems content to hold rates at steady levels. During his press conference, Chair Powell remarked that monetary policy was restrictive and that rates could be lowered if the labor market weakened. He added that a rate hike was ‘very unlikely’ and that the inflation in resurgence could be temporary due to seasonality and noise. 

While fixed income rallied following the FOMC meeting, PIMCO expects FOMC members to raise their inflation forecasts from 2.6% to 3% for core PCE at the upcoming meeting. The firm also sees an increased risk of no rate cuts this year if inflation data comes in closer to 3% than 2%.

Finsum: Following the latest FOMC meeting and hot inflation data, PIMCO is lowering the odds of a Fed rate cut in 2024. 

Entering the year, there was optimism around real estate stocks given consensus expectations of rate cuts due to inflation falling to the Fed’s desired level and a weakening economy. However, the economy has defied skeptics and remains resilient, while inflation is plateauing at higher levels. As a result, the Fed will be less dovish than expected, and the market has tapered back expectations for rate cuts to between 1 and 2 by year-end. 

Another consequence of the data is that mortgage rates are trending back to last year’s highs, with the 30Y at 6.9%. The real estate sector sank lower following last week’s inflation report, led by self-storage companies, office REITs, and homebuilders on the downside. 

Over the past month and YTD, the Real Estate Select SPDR Fund (XLRE) is down 4.6% and 7.8%, respectively. The current environment of rates at a 23-year high is clearly a major headwind. And there are no indications that the status quo will meaningfully change until there is improvement in terms of inflation or more damage to the economy. The impact is evident in terms of Fed futures. At the start of March, odds indicated more than a 50% chance that there would be four or more rate cuts by the end of the year. Now, these odds have plummeted to 5%. 

Finsum: Real estate stocks have sunk lower in the last month, along with the odds of aggressive rate cuts by the Fed. As long as ‘higher for longer’ persists, there will be considerable stress for the weakest segments of the real estate market.

Stocks and bonds have been weaker since Wednesday’s stronger than expected inflation report. While some on Wall Street are now questioning whether the Fed will be able to cut rates at all, Rick Rieder, Blackrock’s head of fixed income, continues to see rate cuts later in the year.

He notes that Thursday’s PPI report was softer than expected and an indication that most inflation is contained in the services sector. He doesn’t believe that monetary policy could have too much impact on this type of inflation and that it would have damaging effects on other parts of the economy. Overall, he sees recent data consistent with core PCE at 2.6-2.7%.

He believes the current data justifies between one and two rate cuts before year-end. However, he believes that the data could still evolve in a way that justifies more. With rates above 5% and core PCE below 3%, monetary policy is very restrictive, so he believes the Fed will lower rates regardless.

In terms of fixed income, Rieder is bullish on short-duration notes, as investors can get yields between 6% and 7%. He sees the 10-year Treasury yield modestly declining into year-end due to softer economic data and the Fed cutting rates. However, longer-term, he believes that it is range-bound between 4% and 5%.

Finsum: Many on Wall Street are starting to turn more pessimistic about the Fed’s ability to cut rates given recent inflation data. Blackrock’s Rick Rieder still sees cuts later in the year, even if the data doesn’t significantly improve.

Stocks were lower, while Treasuries caught a bid following the latest FOMC meeting which was deemed hawkish despite the Fed holding rates as expected. In essence, Chair Powell’s remarks during the press conference made it clear that the central bank is not willing to cut yet.

In response, markets were in a risk-off mood. Fed futures showed that the odds of a rate cut at the next meeting declined from 40% to 36%, while the odds of the first cut happening in May increased to 59% from 54%. 

Overall, the policy statement and Powell’s press conference underscored that the Fed is moving in a more dovish direction, just not as fast as the market’s desired pace. The policy statement expressed that there is a better balance in terms of employment and inflation goals. However, before cutting rates, it wants to see even more progress on the inflation front. In essence, the resilient economy and labor market mean that the Fed has more latitude to continue its battle against inflation before pivoting to support the economy and risk re-igniting inflationary pressures.

Rather than hawkish or dovish, its current stance can be characterized as ‘data-dependent’. Some of the important releases, prior to the March FOMC meeting, will be the January and February employment data and consumer price indexes. 

Finsum: The Fed held rates steady but came out slightly more hawkish than expected. This led to the odds of a rate cut in March slightly dropping, but the bigger takeaway is that the Fed sees inflation and employment risks as being balanced and remains data dependent.