Name: Where to Invest Ahead of the Fed’s Interest Rate Decision and Trump Trade War
Uploaded: 2025-03-16T10:00:00Z
Duration: 20 min 50 s
Description: WSJ’s Take On the Week co-host Telis Demos talks with interest rate strategist Ed Al-Hussainy about what to expect from the upcoming Federal Reserve meeting, how policy in Washington is intersecting with the central bank’s mission and more.

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WSJ’s Take On the Week co-host Telis Demos talks with interest rate strategist Ed Al-Hussainy about what to expect from the upcoming Federal Reserve meeting, how policy in Washington is intersecting with the central bank’s mission and more. Photo: WSJ

https://m.wsj.net/video/20250314/e975ad2c-4291-49da-b437-07ceb9fdae5f/1/hls/manifest-hd-wifi.m3u8

WSJ’s Take On the Week co-host Telis Demos talks with interest rate strategist Ed Al-Hussainy about what to expect from the upcoming Federal Reserve meeting, how policy in Washington is intersecting with the central bank’s mission and more.

Where to Invest Ahead of the Fed’s Interest Rate Decision and Trump Trade War

What would you say is the Fed's relationship with politics in Washington right now? Are they more engaged with it than usual, trying to stay out of it? Does that complicate things for thinking about what they might do next?

They're desperately trying to stay out of it is the way I would characterize it. And it's impossible.

The Federal Reserve is always a key player in the markets, but sometimes, it feels like it's the only thing that matters. And right now, with more investors uncertain about the economic outlook and the general policy volatility of the Trump administration, more people are betting, hoping, that the Federal Reserve might ride to the rescue in the near future. So what better time for a conversation with Ed Al-Hussainy. He is the interest rate strategist for Asset Manager Columbia Threadneedle Investments. And this is WSJ's Take On The Week. As you can see, we're back in our temporary studio, but as always, I'm Telis Demos. Ed, welcome to our show.

Good morning.

Let's get right into it. The Federal Reserve is meeting this upcoming week on March 18th and 19th. What are you looking for outta this meeting?

I think in contrast to what's going on in DC, I am looking for the Federal Reserve to take itself out of the equation and be quite chill.

So, no big news is the big news.

No big news is the big news.

They've telegraphed this quite well. We're at a stage where the Fed is trying to build some confidence around what's going on in the economy, particularly around what's going on in the inflation story. And right now, it's just too early. And so it's likely that they're gonna be on hold well into the summer, potentially into the early fall.

So, in by doing nothing, you're saying the Federal Reserve can actually kind of do something by sort of sending the signal that no need to panic, everything's okay.

I think that's exactly right. Reinforcing the fact that the economy is in a relatively stable place. There's some changes happening on the margin. Again, policy is coming into play. We had a really strong year last year in terms of growth, in terms of the labor market. Some of that strength might be fading in the background, but it's not enough to bring the Fed into the equation. Not enough to bring the Fed into action at this stage.

So, the markets had been betting at some point that the Fed wasn't gonna cut at all? Was that sort of where things were headed?

It was less than two and now it's a shade more than three. The great thing about these expectations is they move on a daily basis and they're the collective wisdom of the market. And it's almost certainly wrong. And again, I think the Fed is in a position where they can reinforce the fact that they just don't have enough information yet to act. They're also in a position to reinforce two other, I think important things. One, that the next move is likely to be a cut. I think that's important in terms of shaping, once again, shaping expectations, shaping where treasury yields will be in the course of this year, just the the rough zip code and reinforcing the fact that monetary policy is still quite tight. They are restrictive at this stage. They executed a hundred basis points, a percentage point of cuts last year.

That's one, one point of cuts, basically. Rates went down a full percentage point.

One percent.

A whole percentage point. It was very aggressive. You know, it happened across three meetings in the fourth quarter of last year. They paused there with the understanding that there's a lot more work to do in terms of recalibrating where they are, recalibrating their posture. That's gonna proceed very likely this year. But we just don't have enough data for them to front load it into the first half of this year.

And talk to us about the economic environment right now. Obviously, the Fed thinks about part of its mission is to combat inflation, part of its mission is to further economic growth, but there's so much kind of interacting in those two spheres right now. What's going on with policy? How would you describe the economic moment right now?

We have a new administration that's come in with, you know, a dramatically different vision for where they want the economy to end up in the coming years, if not in the coming decades. We're at the very early stages of them trying to execute on this vision. That's a big secular shift. A more closed economy, perhaps an economy that's a little bit more manufacturing intensive and an economy that in many ways, you know, it takes us away from kind of the secular trends that we've seen over the coming, over the course of the past several decades where services have really taken over. The economy has been leaking productivity. Productivity has been uncharacteristically low over the course of the past two decades.

So we're talking about economics, but your day job is not economist. You're an investor. You work at an asset management company. How should investors be thinking about not just what the Fed is doing, but then also what that tells us about the economy? What's the right path for an investor during this period of uncertainty, would you say?

If you are an investor and you're constructing your portfolio, whether you're an institutional investor, a retail investor, there really is no difference. You're thinking about how do you allocate across risky assets like equities and more safe haven assets like US treasuries and high quality corporate debt. And one of the things you are betting on is if there is going to be a disruption in let's say equity markets, equities come down. You want some ballast, you want some buffer coming from the treasury and the high quality bonds out of the portfolio.

You want a 60-40 portfolio.

It's not dead yet, okay.

The old 60-40.

It is most certainly not dead. We can have an argument about the right proportions, but the intuition is very powerful. And it's important to recognize that when we have periods of high unanticipated inflation, 2022 is a fantastic example. 2018 is a fantastic example. Risk assets and bonds underperform cash. So the diversification benefit evaporates 'cause everything sells off. One of the bets we're making actively right now is that most of that inflation risk is in the rear view mirror, which gives bonds that fantastic quality back that they're able to buffer your portfolios, that they outperform in an environment when there's a drawdown in, in risk assets.

And when you say bonds, are you talking more corporate bonds, treasury bonds, and in general, you're referring to longer term bonds, right? Five, 10, 20, 30 year type investments?

Exactly right. So, the curve, the yield curve is relatively flat. So in terms of the yield--

Meaning that short term interest rates and long-term interest rates are pretty similar.

Pretty similar.

You're not getting

a huge pickup in yield by putting your money away longer in a longer term bond.

Exactly right. There is a compelling argument to not being in cash, not being in a money market fund. There is a compelling argument to owning treasuries, high quality corporate debt like, does offer you a little bit of a pickup. But honestly credit spreads, which is the yield difference between treasuries and corporate debt, is at multi-decade lows.

And it sounds like even if the Federal Reserve is not in cutting mode, you're saying that the bet still is leaning on the side of they will at some point start cutting and so maybe that's why this is the time to get into duration, maybe ahead of that.

That's right. And the, a simplifying question to ask is do you think the next thing the Fed will do, will it be a cut or a hike? If it is a cut, it adds significant buffers to that bond story. If it's a hike, it means something's gone wrong, the Fed is seeing inflation on the horizon, it's unanticipated, right? Relative to where we are today. And that's the toxic, you know, backdrop for bonds. I think the risk of that is there, but it's relatively low.

The housing part of the economy has not been doing very well lately. Not a lot of people have been buying and selling homes. Home prices are high, but the market is stagnant. Where does that leave an investor? Some people, I think, have been moving into mortgage bonds, right? There are a few ETFs that offer that sort of exposure. Obviously, there are people who are also waiting for mortgage rates to come down to buy a new house or move. From a fixed income investor's point of view, what are your thoughts about the mortgage market?

We tend to think about mortgages, particularly agency, what are called agency backed mortgage backed securities.

Those are the Fannie Freddie kind of benchmark mortgage bonds.

That's exactly right. And because they have the government backstop, they carry very little credit risk. So, the risk of a default when you're buying that security is close to zero. So what you're really looking at is to what extent does that security give you a yield pickup relative to treasuries? To what extent does it give you a yield pickup relative to safe corporate debt? And then what is the risk here? And the risk with these securities is refinancing. And the good news today is because mortgage rates are really high, the odds of large scale refinancing in the economy are very low.

Meaning that people pay back the mortgage and then get another mortgage at a lower interest rate, right, so the, so essentially what those, the yield that you're collecting goes down because people are refinancing at a lower rate.

That's exactly right. They go back to their bank. They say, "Look, interest rates have declined. We took our our mortgage at a significantly higher interest rate. We'd like to refinance into that lower rate," which is again an option to mortgage holders. And that's what we call prepayment risk. You are bringing forward your payments. And so as the holder of that security, the value goes down. We don't wanna be on that receiving end. And the good news is, right now, mortgage rates are still very elevated. The odds of that happening are very low. Most people who own a home today have a mortgage somewhere in a three to 4% area and outstanding mortgage rates. If you are a new home buyer, you are getting a mortgage of 7%.

So given all that Ed, what's your outlook for mortgage rates?

The mortgage rate is sort of inexorably connected to where the 10 year treasury yield will be over the coming 12, 18, 24 months.

So it's not in the Fed's next cut. It's more in these longer term bonds.

That's exactly right. And there's several reasons for why those mortgage rates could go down. The most obvious is an unpleasant one and that's a recession. We usually have a significant decline in treasury yields in recession. Unemployment goes up, inflation goes down, yields go down as the Fed gets into an aggressive cutting cycle. So the good news is that's not the only way to get these rates lower.

Okay, good.

One of the other key unknowns is our fiscal future. And to the extent that Congress is able to narrow the fiscal deficit, narrow the outlook for the fiscal deficit, get us on a path or on a better path of fiscal sustainability. And that is picked up by markets, that takes that fiscal premium out of 10 year yields and lowers mortgage rates. But let me add kinda my personal view here. I think the low interest rate environment is far from an aberration. It is in many ways the norm. It reflects our demographics, it reflects the state of productivity, which is not healthy. And it reflects the impact of technology on this economy, all of which have worked to pull interest rates down in a secular way over decades. I think what it's gonna take, what it's gonna take to bring those mortgage rates down is really a little bit of patience.

We're gonna take a quick break and when we come back, a few more questions about some of the more complicated things that the Fed is up to.

Details, how dare you.

We're back, we're here with Ed Al-Hussainy. He's the interest rate strategist at Asset Manager Columbia Threadneedle. So Ed, we've been talking about the Fed and interest rate decisions. That's kind of the big headline news, but there's other things going on with the Fed's role in the economy and there's a term that people in the markets use a lot, quantitative tightening. Tell us about, why don't you, I'll let you explain what that is and then also tell us why we should be thinking about and looking for the Fed's comments about QT, as they say.

So the story of quantitative tightening has to begin with quantitative easing.

Okay.

And that's the process in which the Fed buys assets, particularly disproportionately treasuries issued by the US government and mortgage backed securities in a period of stress. And that's their way of adding liquidity to markets. It's their way of backstopping markets. That's the business they were in in 2020 and 2021. And the Fed stopped buying those assets and quickly transitioned to running off the balance sheet, which essentially means they initially stop buying them and then they allow those assets to mature off the balance sheet. Optically what that means, and this is the process of quantitative tightening, is the size of the Fed's balance sheet shrinks and we've been in that mode for the better part of the last two years. We're now arriving at a point where that process is likely to end and it's likely to end, I think in the coming months. And you are right. If there's one thing that comes out of the meaning, it's a signal from them that they're quite close to making that decision. Eventually, if there's stresses in that system, they cascade out into broader markets. So if you're an investor in equity markets, this stuff is in the background, you don't wanna know about it and you are right, you shouldn't get into that level of detail.

Okay.

But as the Federal Reserve, you're thinking about financial stability. You're thinking about how do I make sure that what I'm doing with my balance sheet doesn't go too far? And that's the conversation, that's the debate they're having now. And I think in terms of the signals, the smoke signals that have come out this year, it's very likely that they're gonna stop that process or slow it significantly in the coming months.

Sounds like something like the plumbing in your house. You go to bed every night, you hope that it works and everything keeps flowing until that one day when suddenly something breaks and it becomes your world for the time being. We wanna help the,

That's a great analogy.

we wanna hope that water keeps flowing around and the economy pipes don't break.

Exactly right.

We, as a society, like to think of the Fed as a politically independent organization. To the Fed, that seems important. They get drawn into politics sometimes. President Trump has very strong views about what interest rates should be and the Fed has to think about policy, right? They have to think about politics. They don't know what tariffs will do to the economy, whether or not there will be, you know, a major change in tariffs. That's secular change stuff you were talking about. What would you say is the Fed's relationship with politics in Washington right now? Are they more engaged with it than usual, trying to stay out of it? Does that complicate things for thinking about what they might do next?

They're desperately trying to stay out of it is the way I would characterize it. And it's impossible, like the center of gravity in DC at the moment is around significant and large scale policy shifts that this administration is trying to execute, that Congress is likely to execute with respect to the tax code later this year and the Fed will not be immune to them. What the Fed is trying to tell us right now is, look, we have a lot of flexibility with what we can do in terms of the Fed funds rate. The only tool we have really, if necessary, we can cut very aggressively, not a luxury we've had in the past 15 years 'cause rates were really low. Now, we have a lot of room to cut if something starts to come off the rails and we can stay on hold for much longer if we start to see inflation creeping back into the system and in the extreme, we can resume our hiking cycle. It's not a conversation that's out happening out in the open, but it's implicit. That gives us a lot of flexibility and a lot of buffers to stand back, observe what's going on in DC, start to actually see some of these changes in the data before we react. That's, at the very least, their view and what they're putting out at the moment. Lemme say from my perspective, the history is the Fed always wants to be systematic, predictable, gradual. It never wants to act kind of too quickly. The reality is they're always forced by events to be aggressive. That was the case in 2020 when they had to cut. That was the case in 2022 when they had to hike much more aggressively. If you go back over Fed cycles, you know, going back to the 70s, every single Fed shift from being on hold to cutting aggressively has happened in a matter that they failed to anticipate.

Well, so maybe what would be unique is if politics didn't affect what the Fed did. We're gonna take one final break and when we come back, we've got one last question for Ed Al-Hussainy of Columbia Threadneedle. Welcome back. Alright Ed, in 30 seconds or less, what is the smartest investment that you think somebody could make right now given the interest rate and economic outlook is so uncertain? Is it cash, gold, Bitcoin, Dogecoin? What's, what is the all-weather investment right now?

Fantastic. I think the closest I can get to an all-weather investment is something very boring and it's really the 10 treasury note. Yields are still quite attractive right around that four, four point a quarter percent, adjusted for inflation. You're getting paid right around 2%. Again, think about that over the next 10 years. That's a fantastic yield relative to where we've been over the course of the past 15 years. And I think it buys you a lot of comfort. You can come back and reallocate into risk if there's a significant draw down in risk. We are in the middle of a correction in equities and you don't have to worry about it on a daily basis the way you would with some of the other, you know, things you mentioned at the beginning of that question.

Well, boring, comfort, safe, maybe those are some of the things people are looking for right now and it's right there staring them in the face in your treasuries. Ed, thanks so much for being on talking with us about the Fed interest rates, the economy, everything going on. This has been great.

Thank you.

Thanks so much.

Was your last guest left, left-handed?

Okay you're, it's, you're hitting on one of our favorite talking points around here, which are mugs with the branding on the wrong side.

I'm trying to angle on how I can take the mug home 'cause you guys need a right hand mug.

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