High-Quality Fixed Income – Overweight duration
Contrary to market expectations of a rate decrease in March, the Federal Reserve held firm on interest rates during two first-quarter meetings, reaffirming their dedication to achieving a 2% inflation target. Since the onset of rate hikes in March 2022, the Fed has increased rates eleven times, setting the Federal Funds rate between 5.25% and 5.50%. Concurrently, Federal Reserve Chair Jerome Powell has been trimming the Fed’s balance sheet by $95 billion monthly, leading to a 16.5% reduction in assets, or about $1.48 trillion, from its peak in April 2022.
In its fifth successive meeting in March, the Federal Open Market Committee (FOMC) chose to maintain the status quo on rates. The anticipated decision was overshadowed by the Fed’s unchanged economic outlook in their Summary of Economic Projections. Notably, the median forecast for 2024 rate cuts remained at three, with divergent views among officials—two predicting no cuts, two foreseeing just two, and only one advocating for more than three cuts. This is a marked deviation from December 2023’s projections, where five members expected over three cuts. Additionally, the Fed has upgraded its economic forecasts, such as GDP for 2024, raised inflation projections for the same year, and adjusted the projected timeline for rate normalization in 2025.
Chair Powell acknowledged the persistence of inflation, which has exceeded expectations in recent months. However, he emphasized that the latest figures do not alter the general trend of a gradual decline in inflation towards the 2% goal. He clarified that the Fed would neither overreact to the data from the past two months nor disregard it.
High Yield Fixed Income – Neutral Corporate, Overweight Municipal
US Equities – Underweight, tilt toward small-cap value
International Developed Equities – Overweight, tilt toward Japan
Emerging Markets – Neutral, neutral China, overweight Korea, Mexico, India
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