The Fed is likely to hold rates steady in the near term.
- The balance of risks of higher inflation is evolving rather than dissipating. While tariff-related pressures are now improving, energy/geopolitical developments and AI-related demand dynamics remain active sources of pressure on general prices.
- We expect the June meeting to include removal of the easing bias and a shift in the 2026 dot plot toward no cuts, with the start of the easing cycle now pushed back to March 2027.
And we think the bar for a Fed hike is high.
Waning oil-related growth headwinds are likely to return GDP growth to trend, reinforcing disinflation in the second half.
Financial conditions have also tightened, particularly given long-end rates are now close to multi-decade highs, which are key borrowing rates for both households and corporations.
In a scenario where the Strait of Hormuz remains blocked for a prolonged period, risks of lower growth could lead to rate cuts.
Lower interest rates strengthen the case for investors to lock in yields.
- We think market hawkishness on global rates right now is a chance to lock in high yields, especially in quality bonds with short to medium maturities.
- An allocation to emerging market bonds can enhance yields and offer an alternative to developed market fiscal challenges. Investors can also consider equity income and yield-generating strategies for a diversified income portfolio.
- We believe Fed policy overall will remain supportive for US equities, and we favor a balanced and diversified approach to the asset class.
New this week
The US consumer price index (CPI) rose 4.2% y/y in May, up from 3.8% in April and marking the highest level in three years. According to data released on 10 June, core inflation, which excludes volatile items like energy and food, accelerated to 2.9%, from 2.8% in April. But core goods prices declined on a monthly basis for the first time since May 2025, suggesting a deceleration in price increases in tariff-sensitive categories.
Did you know?
- We think bond markets are currently too focused on the short-term inflationary impact of higher energy prices, and not enough on the potential medium-term negative economic growth impact, which could drive interest rate cuts.
- Cash tends to underperform other assets over time: Stocks have outperformed cash in 86% of all 10-year periods and 100% of all 20-year periods since 1926.
Investment view
We believe markets continue to overprice the risk of a tighter Fed policy, presenting an opportunity for investors to "lock in rates." We like short- and medium-maturity quality bonds, and see value in select exposure to higher-beta segments such as emerging markets, high yield, or subordinated debt. We also expect Fed policy to remain supportive for equities.
