So What Is the Fed’s End Game on Rates?

Commonwealth’s McMillan thinks it has two half-point increases ahead, and that’s it.



Wall Street soothsayers are trying to figure out when the Federal Reserve will end its tightening drive—and perhaps lower rates to blunt a recession. To Brad McMillan, CIO at Commonwealth Financial Network, the likelihood is strong that two more hikes, of a half percentage point each, are ahead. Then, he predicts, the Fed stands pat.

How come? Two reasons, in McMillan’s view: first, that high inflation, the impetus for the rate boosts, will ebb by year-end, and second, that the threat of recession is worsening, thus requiring a dovish, or at least less hawkish, policy ahead.

If true, the inflation abatement would be good news for beleaguered consumers. The Consumer Price Index soared 9.1% in June, from 12 months earlier.

McMillan’s rate forecast tracks that of the futures market. Following the Fed’s just-announced decision to increase its benchmark rate by 0.75 point, the market’s expectation is that two more half-point boosts will follow. That would put the federal funds rate between 3.25% and 3.5%.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

In a research note, McMillan depicted talk of a near-term end to hiking as premature. “It is still too early to pull back, and the Fed won’t,” he wrote.  Yet it isn’t too early, he added, to anticipate what comes after the two half-point increases he sees as next. That, he said, “is likely to be less hawkish.”

“Longer-term interest rates never went up that much and are now pulling back—a sign that current higher rates are not expected to last,” he observed. Indeed, the 10-year Treasury bond now yields 2.8%, down from 3.5% in mid-June.

On inflation, McMillan is on Team Transitory 2.0, meaning that we have seen the worst and those high prices will calm down. “Some of the key inflation drivers (e.g., the price of gas) have declined, and supply chains continue to improve, driving supply up even as demand eases,” he wrote. With the CPI at a 40-year high, he continued, “the Fed has pushed rates up quickly, but there will be much less need to do so once inflation moderates toward the end of the year.”

The public’s inflation expectations are a little less dire lately, he pointed out. And this is important, because what people foresee can be a self-fulfilling prophecy—as happened in the double-digit-plagued 1970s.

The University of Michigan’s poll for July shows that consumers see inflation moderating to 5.2% over the next 12 months, down from 5.3% the month before. And over a five-year timeframe, they see it slowing to a 2.8% pace, the lowest in a year and down from 3.1% in June. By next year, McMillan said, “the Fed’s job is largely done.”

Key to the Fed’s strategy is that higher rates will cool consumer demand, and that is occurring. Still, McMillan cautioned, now is not the time for the central bank to contemplate lowering rates as an economic stimulus.

Related Stories:

Will the Federal Reserve Go Too Far?

The Plus Side of Rising Interest Rates: Lower Pension Liabilities

Powell Remarks Overshadow Inflation Good News as Stocks Continue to Tank

Tags: , , , , , , , ,

Hawaii ERS Names Howard Hodel Acting CIO

Hodel succeeds Elizabeth Burton for his second stint in the role.


The Employees’ Retirement System of the State of Hawaii has named Deputy CIO Howard Hodel acting CIO of the $22.4 billion pension fund retroactive to July 1, the fund announced.

Hodel succeeds Elizabeth Burton, who resigned at the end of June after nearly four years as CIO. As deputy CIO, Hodel oversaw the $7 billion diversifying strategies portfolio and served as the retirement system’s chief risk officer. It is Hodel’s second stint as acting CIO—he was tapped to perform the same role in 2018 after Vijoy Chattergy left and before Burton was hired. Anthony Goo, ERS’ investment officer of public markets, has been named acting deputy CIO. 

“We are particularly well-served by Howard and Tony’s willingness to step up and serve our organization in these vital capacities,” Executive Director Thomas Williams said in a statement. “They will assure us continuity of management, strategy implementation and portfolio development. Each has contributed significantly to our progress to date.”

In May, when Burton announced she was stepping down, Williams said Hodel is “more than capable of handling affairs during any interim period, or even perhaps permanently.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Before joining ERS in 2014, Hodel was CEO for eight years at Absolute Plus Advisors, LLC, which provided financial, investment and energy consulting services to institutional clients. Before that, he worked for more than three years at Bank of Hawaii, where he was executive vice president and manager of the bank’s asset management group, according to his LinkedIn profile.

Prior to working at the Bank of Hawaii, Hodel was senior vice president and manager, market risk investments at Bank of America. He served in the bank’s treasury department as a market risk manager, planning manager and mergers and acquisitions manager. He also spent nine years at British Petroleum in various financial, economic and planning positions.

Hodel earned a degree in economics from Dartmouth College and received an MBA in statistics and international business management from the Catholic University of Leuven, Belgium. He also received an MBA in finance and accounting from the University of Chicago’s Booth School of Business.

Before joining ERS, Goo worked at the Bank of Hawaii in various management positions, including senior vice president in charge of fiduciary asset management and institutional services departments. He has also worked as CIO of Bishop Street Capital Management, senior vice president and manager of First Hawaiian Bank’s trust portfolio management department and portfolio manager at the asset and liability department of First Interstate Bank.

 

Related Stories:

Elizabeth Burton to Step Down as CIO of Hawaii ERS

Hawaii Retirement System Names Elizabeth Burton CIO

HIERS’ Risk Officer Steps Up as New CIO Search Begins

 

Tags: , , , , , , , ,

«

Ad Blocker Detected

We have detected that you are using an ad blocker in your browser. For further access of our website, please disable your browser's ad blocker.