The question at a recent press briefing with Delaware Investments wasn’t “will the Fed raise rates this year, or won’t they?” nor was it “will it happen in June or September?” but “will it be enough?”
Even if the Fedreal Reserve raises interest rates, will that be enough to fight any future economic weakness?
Three bond managers from Delaware Investments recently spoke at a press briefing in New York City about the fixed income market and the expectations for the Federal Reserve to begin raising rates.
“I don’t think the Fed necessarily wants to raise rates. I just think they want higher rates,” said Brian McDonnell, a senior vice president and senior portfolio manager at Delaware Investments.
“And, I think if they raise rates gradually, if they get to say 1% or 2%,” he added, “I think the thought is that if they get to a higher rate, they’ll actually have some ammunition if we go into another recession or start to see some economic weakness.”
McDonnell, a member of the firm’s taxable fixed income portfolio management team with responsibility for portfolio construction and strategic asset allocation, is not so sure.
“I don’t actually buy that argument that if they get up to 1%, they’re going to have enough ammunition to stave off any sort of economic weakness,” he said.
McDonnell pointed to past easing cycles where “most of them have averaged between 300 and 500 basis points.”
“So, if they get to a 1 or even a 2% funds rate that doesn’t necessarily give them a whole lot of ammunition if they do see some economic weakness,” he said. “It’s kind of like bringing a knife to a gun fight.”