Hi, I’m John.

And I’m Julie.

We’re the hosts of the Hartford Funds Human-centric Investing Podcast.

Every other week, we’re talking with inspiring thought leaders to hear their best ideas for how you can transform your relationships with your clients.

Let’s go.

Welcome to a special edition of the Human-centric Investing podcast. You know, with news of the Federal Reserve meeting recently to decide the direction of interest rates, pauses, so on and so forth, I thought, who better to have on the podcast today that of Amar Reganti. Amar is managing director at Wellington Management and also the fixed income strategist for us here at Hartford Funds. And so, Omar, welcome back to the podcast.

Oh, thanks for having me on again, John.

So, Amar, I think, you know, everyone kind of expected a pause in the Fed rate hikes in June, which is what happened. But Chairman Powell was pretty specific about the fact that this pause applied only to the June rate meeting, not necessarily July or any other time this year. So as we kind of look into the crystal ball, if you will, what was the biggest insight that you took away from his comments?

Yeah, well, you’re absolutely right, Chairman Paul and the FOMC left the Fed funds policy rate and its target unchanged during this most recent meeting of of the committee. But you know, what also came out as you mentioned is the hawkishness of the statement and and the press conference that followed. In it Chairman Powell stated that the majority of the members of the FOMC believe that there needs to be additional tightening over the course of this year. And what was alluded to was how strong and resilient the U.S. economy has been, which has turned out to be a surprise for many people, given the fact that we’ve had almost 500 basis points of hikes since the hiking cycle started.

Well, and I think those comments caught people a little bit by surprise, maybe a little bit more hawkish than people were thinking. I mean, prior earlier in the year, people were talking about maybe even a rate cut by the end of this year, which I guess is not out of the question. But how do you think the markets reacted to that news or that hawkishness, if you would?

So from our perspective, we thought markets were a little overly optimistic this year in terms of of getting a rate cut from the Fed. You know, we were clearly far away from from the 2% target rate in core PCE that the Fed has been really looking for. And Powell said a number of times that more progress needs to be made. You know, while, you know, markets obviously pushed out any thought of a cut till nearly the end of the year, beginning of next year now, and that was the most immediate reaction. But what the Fed has really done is almost preserve optionality, John. They’ve paused to really kind of, you know, take stock of the cumulative rate hikes and their impact, and they’ll have a bit more data by the time the next meeting comes. At the same time, you know, they’ve signaled to markets that right now they would be thinking there needs to be more tightening to come. And that way, you know, there hasn’t been an exuberant reaction from markets, which is something the Fed might have been afraid of because it would have possibly helped derail a little bit of the deflationary impulses that that we’ve started to start to see creep into the data.

Amar, I think, you know, whenever I think about it, I’m always like, boy, I’m glad it’s their job and not mine. They seem to be kind of walking along the edge of this cliff where on one side you’ve got inflationary pressures, on the other side you’ve got economic concerns. In terms of the business cycle, I think a lot of it investors may be concerned about the Fed making a policy mistake. Right. If you if you think out there that the news is all over the place, soft landing, hard landing, when’s it going to happen, so on and so forth. How concerned do you think investors should be about the Fed making a policy mistake, given kind of what we heard early on about transitory inflation? And that turned out not to be exactly right. So what are you thinking about that Amar?

Well, clearly, it’s still far more of an art than a science. The the role of central banking in economic management, historically speaking, we in these tightening cycles there have been what we would kind of refer to as policy mistakes. And what do we what do we mean by that? We mean the Fed has tightened so much that rates go to a level that is not sustainable for economic growth and we effectively end up in recessionary conditions. And the Fed’s other mandate, you know, employment conditions weakens dramatically past the point of what they consider acceptable. So that’s the type of policy mistake people are worried about right now. That’s, you know, front and center. And that’s exactly why this pause makes so much sense, like a pause or I want to use the word. Plus a skip is is far more likely where they skipped at this meeting and they’ll assess. And then right now, they would say on balance, they’ll probably need to hike again before it before the end of the year up. This is in line with what I’ll call a very measured pace of of like the tweaking of of the policy rate we had. You know, and Powell said this we started out this tightening cycle with 75 basis point hikes. Then we went to 50 and then we’re doing 25. And as you sort of slow the pace of those hikes in terms of the size, it does make sense to get to a point where you assess. Right, because what you don’t want is all of a sudden all of those hikes start hitting the economy almost cumulatively at the same time. And you’re still in the mode of like you need to continue to hike. So that’s what they’re concerned about, that that lag in monetary policy hits all at once. And because of that, they’re being very judicious. And that’s why, you know, we say this is a really data driven FED it’s going to look meeting by meeting at the incremental data that’s coming out to see whether or not they’re achieving their goals.

So, Amar, we we hear a lot about, you know, what indicators they may be looking at. But really when you think obviously inflation is a big one and whether it’s they’re their rate hikes have had impact on inflation. But when you look at other indicators like housing and employment, which typically lag a little longer, do you think they’re seeing indications that their policy is working to this point? They’re just as much as they can trying to find. Like what’s going on from your perspective in the housing and maybe other areas of the credit markets?

Well, you know, housing has traditionally been one of the most interest rate sensitive parts of of the US economy, and it has reacted toward the Fed rate hikes and just the overall higher rate environment. You’re just not seeing the production of new mortgages that you would normally see at this point in time. And there’s a direct, you know, from for mortgage rates to the purchase of a home. But housing is not as sensitive as it used to be. Pre financial crisis, a substantial portion of the US housing market was financed via adjustable rate mortgages or some type of floating rate mortgages because of financial stability concerns. You know, that’s a much smaller portion of the overall mortgage market. And because of that, a significant portion of the US population that owns homes locked in 30 year fixed rate mortgages prior to rates moving up. So for those people, you know, rate hikes don’t mean a whole lot, right? I mean, so people at that point only really begin to sell houses when they absolutely need to, whether it’s because they’re moving etc or need to upsize or downsize, depending on what conditions are going on. So that makes, you know, the sensitivity of that sector far more sticky in the overall economy than it used to be. The second and it’s but the portion that Powell, you know, mentioned again and again and again during the press conference was softness in the labor market. So this is the thing, you know, aside from looking at the core inflation numbers, what the Fed is really looking for is to see some type of softness in the overall labor market. Now, you know, critics of Chair Powell might say, well, that must mean recessionary conditions. But Powell was like somewhat explicit. He’s like, I think we will have done a good job if we can allow the labor market to just grab to cool, just not to be a scorching as it has been over the last few years. And if if we can do that and then, you know, growth moderates, you know, you might see and he didn’t use this phrase, but it certainly sounds like what we would call a soft landing, right. Where you might have a bit softer employment conditions, growth, moderates and inflation make significant progress. It doesn’t have to be two right away, but over the next several years make significant progress of getting toward that two.

Amar in such a tight labor market. We hear a lot about the U.S. consumer and what to this point has been the strength of the U.S. consumer, probably because that labor market has been so strong. But do you think we’re starting to see any dents in the armor there? Are we starting to see any indication that these rate hikes are beginning to impact consumer choices?

So um, it, it you’re you’re absolutely right. This has been a an extraordinarily resilient consumer. This is not the consumer of 2008 and 2009. This is a consumer that started what I would call that pre-COVID era. And during COVID significantly delivered without as much debt as they had, you know, pre financial crisis. And then additionally, we’re able to build up significant amounts of excess savings during the sort of peak part of COVID. So, you know, they, once you know the economy opened back up, this consumer was able to consume with almost a vengeance. Right. Like all the pent up sort of demand that had been there. And they did do that for goods, you know, during COVID. And that, you know, obviously started shifting into into services. So it it it will it can take a while for that consumer to feel almost sated. And part of the reason why the consumer has been able to spend so confidently is that the labor market is tight, i.e. people are very comfortable with their employment situation, they’re comfortable with their wages. And even though inflation was running high those years, they themselves felt like they were in a pretty good position. So so they conume. So you are seeing some moderation of that. But the data is very mixed. The the most recent set of retail sales numbers, we got exceeded, you know, the survey expectations. But we are starting to see a little bit of moderation in a number of things. And, you know, a statistic Powell cited before the employment cost index still high, but directionally moving lower. We’re starting to see some wages moderate. You know, the most recent labor numbers that came in here in June are a bit weaker, continuing claims and so on. So we’re starting to see a little bit of weakness. Probably not. It’s not enough data to convince Powell or the FOMC that that we’re there yet. But but directionally, it’s probably the right way. Now, the question is what the pace of that is. Right? And what you don’t want is one or two bits of data are, you know, impacting the FOMC and then them deciding to pause or take all rate cuts off the table because they’re worried they’ll just kick start that economic activity again by signaling double shoots or help kick start the economic activity again.

So Amar going to switch back to inflation again for a moment, just in a couple of minutes that we have left. And we know that generally speaking, the Fed’s target inflation rate has been around 2%. And let’s say that their current policy begins to be effective. Right. And we start to see, you know, inflation kind of weaning off a little bit from where it is. Do you think there’s a scenario where maybe we get not to two, but to two and a half or two and a quarter where they would say, hey, you know, close enough, we don’t want to overshoot it kind of what do you think happens when some of the success in the battle against inflation begins to take place?

So it’s important to remember the Fed has a dual mandate here, and that’s inflation and and employment conditions. So right now the Fed views them out of whack, right? Like it’s done in theory. From an economic management perspective. It’s met its employment mandate, but its inflation mandate is is on the other hand, you know, far away from its target. So what the Fed is seeking is to get that closer, you know, in balance. So if we get closer to two or have made significant progress toward two, ah, and employment conditions start weakening and they start weakening substantially. Well, at that point, the Fed is looking at its dual mandates, probably being in balance, and it doesn’t want to probably at that point dogmatically skew to making sure we’re at two at the cost of its other mandate. I mean, it really is important. It’s its two mandates hist at times in history. It seems like it’s just one mandate, but that’s not the case. So if you think about, you know, how the FOMC has to consider this, they have to see like which one is further from their goal. Right. Like what’s employment conditions versus sort of a full employment world? And what is the inflation rate relative to the 2% target? And as you know, inflation comes down and as they think there’s a softening of labor conditions at that point, they have to make a far more balanced set of choices than just looking specifically at two. But for communications purposes, you know, they believe their credibility comes from saying 2% and really adhering to that in the near term, given how far away we are from that.

Kind of reminds me of approaching a traffic light and trying to figure out when to start braking given the momentum that you have. Right. So.

Right. Right. And imagine the momentum of a 22 plus trillion dollars economy behind it. Right.

That’s a big truck to stop. So, hey, Amar Reganti, got to I can’t thank you enough for sharing your insights with our listeners today and it really appreciate you coming back on the podcast.

Well, thanks for having me on, John.

And all of you. We look forward to talking to you again on a future episode of our Human-centric Investing podcast.

Thanks for listening to the Hartford Funds Human-centric Investing Podcast. If you’d like to tune in for more episodes, don’t forget to subscribe wherever you get your podcasts and follow us on LinkedIn, Twitter, or YouTube.

And if you’d like to be a guest and share your best ideas for transforming client relationships, email us at guest booking at Hartford Funds dot com. We’d love to hear from you.

Talk to you soon.

Investing involves risk, including the possible risk of principal. Fixed income security risks include credit, liquidity, call, duration and interest rate risk. As interest rates rise, bond prices generally fall. Mortgage related and asset backed securities risk includes credit, interest rate, prepayment and extension. Risk loans can be difficult to value in less liquid than other types of debt instruments. They are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. The views expressed here are those of Amar Reganti and Wellington Management’s Investment Strategy team are for informational purposes only, are based on available information and are subject to change without notice. They should not be construed as investment advice. This material and or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part for any purpose without the express written consent of Wellington Management or Hartford funds.