So the Fed Will Finish 2022 With a Rate-Hiking Bang, Then Coast, Right?

Is the Federal Reserve in its rate-hiking end game? That’s the big question about Wednesday’s Fed meeting.

The overwhelming odds, according to the futures market, are for a 0.75 percentage point increase in the November meeting, followed by a 0.50- to 0.75-point boost in December. That would bring the benchmark fed funds rate to a maximum band of 4.50% to 4.75%, from 3.0% to 3.25% now.

If so, that’s quite a bit higher than the current level. But considering that the rate was near zero at the start of this year, the market forecast suggests that the pain is coming to a close and the worst part is over.

Notice what is not part of this prognostication: a pivot to cutting rates. Of course, a recession in 2023 could well change the Fed’s thinking, which now is focused on pulling down the stubbornly high inflation rate. On the flip side, the Fed may elect to blow past what the futures say and tighten even more in the face of resistant price escalation.

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Nonetheless, the betting right now is for the increases to be over in the near future. As an LPL Financial research report puts the matter, while Fed Chair Jerome Powell “has repeatedly stressed, the Fed will ‘keep at it,’ he also noted at the end of September the Fed would soon be approaching the time to slow down.” LPL points out that some Fed officials have indicated “it is now time for the Fed to downshift rate increases as the economy responds to earlier rate hikes.”

For sure, investors hope the Fed will wind up its raises, even if lowering rates again doesn’t soon follow. “The market wants to believe that the Fed, they’re going to get to 5% and stay there for a while,” Rick Rieder, BlackRock’s chief investment officer of global fixed income, told CNBC. “People are tired of getting bludgeoned, and I think they want to believe the bludgeoning is over.”

Continued raises are one thing, and reducing rates is another. To Ken Mahoney, CEO of Mahoney Asset Management, any Fed pivot is far off. The reason is that Fed officials “are stern on their hawkish tone and we expect that to continue.” Still, he adds, the end of the raises may be close. “It would be tough to say they’re only in the second to third inning of rate hikes, and we believe it’s more like the sixth or seventh inning.”

There are some indications that economic growth may be starting to lag, so then inflation may be topped out – which could ease further Fed hawkishness. The housing market, for instance, has begun to flag.

Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, argues that the Fed is getting what it wants. “We have reached peak inflation, as pricing power is being challenged and supply chains are healing,” she says.

And if the Fed keeps raising rates, it will run into political trouble, in Booth’s eyes: “The shifting political winds pose the greatest challenge to the Fed and its independence. There are increased pleas for the Fed to pause its rate hikes due to the notion that job losses are worse than inflation for most households.”

The bill would require colleges and universities to disclose the share of their endowments invested by minority- and women-owned asset management firms.

Congressman Emmanuel Cleaver II, D-Missouri, last week introduced the Endowment Transparency Act, to collect data on and encourage diversity in the investment of college and university endowment assets.

“As colleges and universities tout their efforts to diversify at every level, from the student body to the faculty and staff, I believe they are a perfect place to encourage greater opportunity in this intractable industry – and the Endowment Transparency Act is an important step in that process,” said Cleaver in a statement issued when the bill was introduced.

The bill would require colleges and universities to disclose the proportion of their assets that are managed by woman- or minority-owned investment firms as well as the number of women and minority investment advisers employed by the schools themselves. This disclosure must also note the race of the owners of any minority-owned asset management firm. To be considered minority- or woman-owned, a firm must be more than 50% owned by women or minorities as well as having one or more person who is either a woman or minority controlling the firm’s daily operations.

The bill also requires the Minority Business Development Agency, part of the Commerce Department, to provide a report to Congress, which then gives recommendations on how to improve diversity in the college endowment management sector every other year.

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The MBDA will also be required to host every five years a conference of representatives of higher education and minority and women-owned asset management firms in order to encourage contact and networking. The bill provides a budget of $1 million to host this conference.

Cleaver noted in a bill summary that only 1.4% of the $82 trillion in managed assets in the U.S. are managed by woman- or minority-owned firms, despite those firms having the same performance on average as firms owned by white men. College endowments collectively manage about $821 billion, according to the summary.

Gilbert Garcia, the chairman of the diversity and inclusion subcommittee of the SEC’s asset management advisory committee, and a partner at Garcia Hamilton Associates LP, supports the bill. He says that this legislation “is so needed, and we are very grateful to the Congressmember.” He notes that higher education institutions receive funding and tax exemptions from the federal government and so should be more responsive to demands for more diversity in the administration of their endowments.

Garcia said he hopes this legislation, if passed, “will create a dialogue” and help people “see the reality” of the lack of diversity in this sector. He also notes that college endowments lack diversity in particular, but the entire asset management industry “could all improve.”

In October 2020, Congressman Cleaver along with Congressman Joseph Kennedy III, D-Massachusetts, published a survey of the 25 largest college endowments. All but one, Notre Dame, responded. The percent of assets managed by woman- or minority-owned firms ranged from 5.1% to 35%

The full text of the bill is available here.

Tags: Diversity, Endowments, higher education, Legislation