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The Fed Raised Rates: How Many More Hikes Do We Expect This Year?

Ron Joelson •  March 15, 2017 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we get their thoughts on the Federal Reserve’s decision to hike interest rates.

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2016.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $118 billion in assets under management as of December 2016.

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: The Fed raised rates for the third time since December 2015. Ron, Brent, what’s your perspective on what that means?

Ron: I think it was expected, and the markets were certainly baking it in right up until the announcement. Another question is, how many more? I think we’ll probably see two more increases. And the question of what it means relates to whether we think the overall situation is still accommodative—and I think by any measure it is. If you look at where the Fed funds rate is and you look at inflation, it is still very accommodative. I don’t think the rate increase is going to slow anything down.

Brent: I look at it and I think about the pace comment that you made. And does the Fed have to do more than what the market expects right now? There’s the opportunity for the Fed to do more in the future as the economy continues to accelerate. I think the good news is, as you mentioned, the market’s largely taking it in stride because the economic growth behind it right now is strong enough to support a hike, and the market believes it’s the right time to do it.

Ron: Now, having said that, I do think what’s most interesting about what’s going on is the whole Trump versus Yellen situation. You’ve had Trump, who clearly has wanted to accelerate the economy in every way possible; and you have Janet Yellen, who is saying that we need to put the brakes on. With Trump and Yellen in somewhat different places right now. Everybody’s talking about the probability of a rate hike. I’d like to talk about the probability of Janet Yellen lasting past 2018, when her term is up. I think it’s pretty low.

Brent: Yeah, we’re talking a lot about rate hikes. I think the bigger issue that the market will fixate on in the future is the balance sheet. The Fed owns two and a half trillion dollars worth of Treasuries. And so, how do they shrink that in the future?

Mark: Last month we started picking songs to go with what’s happening in the economy. We had the song “To Every Season, Turn, Turn, Turn” to go with the theme of the rally and consumer optimism. So, if you had to each pick a song to reflect the Fed increasing rates, improved economy and outlook, what would you pick?

Brent: I’m kind of a sap, and I like love songs a little bit (don’t tell anybody). So I’m thinking of my former hometown, Chicago. “Will You Still Love Me for the Rest of My Life?” And I guess the big question I have is if the market eventually has a hiccup—if rates do move faster than what is currently priced in.

Over the past few years you’ve had central banks, which are price insensitive, buy those bonds. The Federal Reserve bought a bunch of them, as I mentioned. You had foreign central banks who were buyers before, and you’ve had commercial banks who had to rebuild their balance sheets after the Great Recession.

Mark: So you’re saying investors shouldn’t shy away from bonds; they should own them for the right purposes.

Brent: Own them for what they are, which is for funding liabilities, for safety in case we’re wrong and the economy does fall apart. I just fear that people are still stretching for yield in places they shouldn’t, and I want people to be clear: Own a diversified bond portfolio, and focus on quality.

I’m afraid that people are potentially looking in places for yield and they’ve been stretching. They might own different ETFs, for example, that bet on a 30-year Treasury, and they’re hoping to sell it to somebody else for a capital gain. You know, bonds are more for return of principle rather than a gigantic return. There are still opportunities in the equity markets around the globe that can help in the event that inflation does tick up.

Mark: And Ron, what’s the view from the institutional investing perspective?

Ron: Brent just mentioned international. I think we’re starting to see this recovery really affecting countries globally much more than we’ve seen in the past. This concept of a global recovery is not what we have seen over the last eight years, and we are starting to see it now. So if you stay diversified—not just between equities and bonds, but also U.S. and internationally—I think you’re going to do pretty well.

Brent: You know, sometimes it’s helpful for investors to “bucket” their money. For example, if you have 20 to 30 percent in equities, a lot of times that can actually be a less risky portfolio from a standard deviation perspective than 100 percent bonds. And you could be rewarded pretty handsomely for taking the risk.

Mark: Ron, time for your song.

Ron: My song will be “Up, Up and Away,” which is for—unless you’re over 40 or 50, you’re probably not going to remember that song. Sounds perfect, right, for the rates? But the best part is the second part of that song is “up, up and away in my beautiful balloon”—think about ballooning and asset classes maybe. But I think the balloon is actually going to—maybe—shrink a little bit, so that would be a good thing.

Mark: So I get one, too. And not knowing exactly what’s going to happen next, I’m going with “We’ve Only Just Begun.”

Hear more from Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

No investment strategy can guarantee a profit or protect against loss. 

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise; and conversely, when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels, there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment-grade bonds. Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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