Outlook for the week
The Federal Reserve sets interest rate policy on Thursday. Following the groundbreaking policy changes at the end of August meeting, this FOMC meeting will be focused on how to put the new policy into action. In anticipation of higher inflation, we are tilted towards shorter tenor bonds due to the risk of longer term interest rates rising.
Key economic releases for the week
Review of the new US Federal Reserve policies
While previously relying on relatively fixed rules to control its interest rate policy, the Fed has decided to relax them in a way that allows them to hold interest rates lower for longer. This is in light of notable changes in expectations of its dual mandate of low unemployment and stable prices. What’s notable is the expectation of higher inflation, which we see as a risk of bear-steepening of interest rates. The Fed only holds short-term interest rates low and not longer-term rates. As such, the anticipation and potential rising of long term interest rates in response to higher inflation could lead to underperformance of longer tenor corporate bonds.