When Will the Fed Be Done With Its Rate Increases?

A large chunk of investors was shocked to hear Federal Reserve Chair Jerome Powell’s hard line last week on pumping up interest rates to fight inflation. Now the big questions animating Wall Street are: How high will the Fed go, and when will it be done tightening?

Right now, Fed’s target rate band sits at 2.25% to 2.50%. The betting in the futures market is that by next July, it will be 3.75% to 4.0%, its likely top. (The July 2023 contract is the last available on this subject.)

If the Fed delivers another 0.75 percentage point raise in its September meeting, as the futures market overwhelmingly expects, then that brings us to 3.0% to 3.25%. By current reasoning, this means there’s only 0.75 point more to go.

Nobody knows, of course, whether a federal funds rate around 4% will do the job and squelch the inflationary surge that began last year. And while the Fed has indicated 2% remains its desired inflation target, it hasn’t stipulated its peak rate, saying that what it does depends on the data.

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

“The magnitude and pace of Fed rate hikes over the next few months is less important than the overall level at which the Fed pauses its rate hiking cycle,” observed David Bahnsen, CIO of the Bahnsen Group investment firm, in a research note. He said he anticipates the Fed to stop at a 3.5% target rate.

Meanwhile, good economic news is “toxic” to the market and leads to selloffs, in the words of Quincy Krosby, chief global strategist for LPL Financial. In a research report, Krosby pointed out that Tuesday’s Job Openings and Labor Turnover Survey announcement—of an above-consensus 11.2 million openings in July—is a result that feeds the narrative of continued wage expansion, thus fueling further inflation.

The good news: According to market sage Mark Hulbert, writing in MarketWatch, stocks rally once the Fed is finished, and often begin their advance before the rate-boosting cycle is completed. (They always fall when rates are increasing.)

In the last rate-increasing campaign ending December 2018, the S&P 500 was flat from its low point to the Fed cycle’s conclusion. Prior to that, for the Fed cycle that ceased in June 2006, the index rose 4%. For all five previous rate-raising cycles before the current one, the average S&P 500 rise from the market low to the cycle’s end was 7.1%.

Lauren Gellhaus, the head of environmental, social, and governance (ESG) at the Teacher Retirement System of Texas (TRS), has left the $200 billion pension fund after nearly five years.

“Last week, I ended an amazing chapter in my career,” Gellhaus wrote in a post on LinkedIn. “While I am thrilled for the next chapter (more on that soon), I am so grateful to all the folks at TRS.”

Gellhaus jointed Texas TRS in 2017 as transition lead for the retirement system’s investment operations department. In that role, she oversaw cash management for the trust, and was the point person for all external cash and securities transitions. The following year she joined the TRS’ external public markets team and maintained coverage of hedge fund and long-oriented mandates.

In January of 2020, Gellhaus was named the retirement system’s first head of ESG to oversee the strategic development and execution of TRS’ ESG initiatives. She said she was particularly proud of adding board-approved ESG language to the investment policy statement, establishing an ESG committee, and creating an educational series, among other achievements during her nearly three years in the role.

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

Although Gellhaus did not say why she was leaving TRS, ESG investing has become much more complicated in Texas since a state law enacted last year requires all state entities to essentially boycott companies that divest or shun fossil fuel investments. Divesting or avoiding investments in fossil fuels is a major part of almost any ESG strategy. The law prohibits Texas’ public pension funds from contracting with or investing in companies that boycott energy companies. The law defines the action of boycotting an energy company as refusing to deal with, terminating business activities with, or taking any action “intended to penalize, inflict economic harm on, or limit commercial relations” with energy companies.

The law is intended to specifically protect companies that engage “in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law.”

Other state governmental entities the law applies to include the Employee Retirement System of Texas, Texas Municipal Retirement System, Texas County and District Retirement System, Texas Emergency Services Retirement System, and Permanent School Fund.

Texas TRS did not comment on whether it was looking to replace Gellhaus, who officially left Aug. 8, as a spokesperson said the retirement system typically doesn’t comment on employee matters. But according to the pension fund’s investment policy statement it “will consider ESG factors that are material to long-term returns and levels of risk.”