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Written by: Signature Estate & Investment Advisors, LLC
The Federal Reserve's recent meeting concluded on March 19th with a cautious outlook on the economy, citing uncertainty due to tariffs and their potential impact on inflation and growth. This uncertainty was reflected in the Fed's revised inflation rate projection, which increased from 2.5% to 2.7% for the year, largely due to the effects of tariffs on imported goods and materials.
The Fed's projections also indicated a potential "higher for longer" interest rate environment, with fewer policymakers expecting rate cuts in 2025 compared to the December meeting (see Exhibit 1). However, the Fed also forecasted slower GDP growth of 1.7% in 2025, down from 2.1% in December, which could argue for lower interest rates if unemployment increases.
Exhibit 1: Federal-funds rate target with evolution of projections
For bond investors, this uncertainty translates to a wider range of potential outcomes for interest rates across the yield curve. To navigate this uncertainty, we continue to advocate for an active approach within bonds, which can help position portfolios for interest rates that may stay high for longer or fall in case of slower economic growth.
By spreading bond holdings across various maturities and employing active managers, investors can benefit from potential changes in interest rates. Longer-term bonds are more sensitive to rate changes, so investing in these bonds could benefit investors if rates fall. Conversely, if inflation expectations increase and bond yields rise, shorter-term bonds would be less affected.
The Federal Reserve's cautious outlook and uncertain economic projections suggest that bond investors should consider diversifying their portfolios across different maturities to mitigate potential risks and utilize active management to capitalize on opportunities that may arise. As always – reach out to your SEIA Advisor to review your bond portfolio positioning and ensure it aligns with your long-term goals.
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