Fed’s Likely Rate Pause Puts Advisors in Scramble Mode

Fed’s Likely Rate Pause Puts Advisors in Scramble Mode

Higher interest rates for longer means getting creative with fixed income.

Wealth Management Editor
Reviewed by: Sean Allocca
Edited by: Ron Day

After the Fed’s 18-month run of rate hikes to tamp down runaway inflation, there are indications that a 5.25% overnight rate is enough for a while and that inflation just above the Federal Reserve’s 2% target rate might be as good as it gets

For financial advisors and their clients, the notion of the Fed semi-acknowledging the reality of higher rates for longer stretches presents challenges—but at least offers a somewhat stable starting point from which to manage portfolios. 

“If rates remain where they are, then I am going to heavily overweight utilities,” said Ed Butowsky, founder and president of Chapwood Investments. 

“The dividend looks very attractive and the cost to create energy for utilities is significantly lower, making a potential wind fall on earnings for utilities a very real possibility,” he added. “I would also be buying short-to-midterm corporate bonds that are rated BB to B, because that would yield a total return of 7% to 10%.” 

Vance Barse, founder of Your Dedicated Fiduciary, is adjusting to the new monetary reality with a strategy that leans on shorter-term bonds. 

“Because inflation is still elevated, we are continuing to roll T-bills and when we see data that supports allocating to duration, we’ll do that,” he said.  

Financial Advisors and Fixed Income as Rates Stay High 

Barse respects the tightrope the Fed is navigating as it tries to simultaneously cool down inflation and steer the economy away from a recession. 

Even though the bond market suggests the Fed could start cutting rates next year, Barse believes the post-COVID economy has upended many of the traditional formulas used to handicap the Fed. 

“The economy has structurally changed from pre-COVID; the labor force has changed and spending practices have changed,” he said. “We don’t see them dropping rates anytime soon.” 

Charles “Chuck” Failla, principal, Sovereign Financial Group, is comfortable with the idea that the Fed has probably finished hiking rates but wonders when rate cuts could start. 

“It’s impossible to make short-term predictions about the Fed with any level of certainty,” Failla said.  

With that in mind, he is “positioning portfolios for rates staying about where they are currently for at least one or two years.” 

In terms of seeing rates fall back down to zero, he isn’t holding his breath. 

“These thoughts are having us lean more heavily into fixed income,” Failla said. “In particular, private credit is looking very interesting to us.” 

For Dennis Nolte, senior vice president at Seacoast Investment Services, the Fed’s likely pause at these levels doesn’t make most bonds look any more attractive. 

“Our portfolios currently have a significant position in cash with allocations in energy, healthcare, and precious metals, and no exposure to bonds except for those with short durations,” he said. 

Cash also looks good to Tim Holsworth, president of AHP Financial Services Inc. 

“We have been cautious on bonds for a long time, and very reluctant to go all in now,” he said. “Once we are convinced rates are not going up anymore we will move to longer term maturities, but we just hope the Fed didn’t raise them too much, as they are prone to do.” 

Federal Rate Hikes Are a 'Fool's Errand' 

Paul Schatz, founder and president of Heritage Capital, said allocating assets based on what the Fed might do is a “fool’s errand and could be potentially catastrophic for clients.” 

“The Fed should stop hiking rates because they’ve done enough damage,” he said.  

However, Schatz remains uniquely optimistic that the stock market is resilient.  

“The young bull market lives on and the pullback that began in July has more room to run,” he said. “I think it winds down towards the end of September or early October and then the bulls run hard into 2024.” 

Contact Jeff Benjamin at [email protected]    

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.