Bond Investing

Reading Between the Lines of Last Week’s Fed Meeting

The Federal Reserve had its first meeting of 2020 last Wednesday.

Typically, after a meeting, the Fed will make three moves…

First, it will issue a brief statement, which it did last Wednesday.

Then, periodically, the chairman – currently Jerome Powell – will have a press conference. But we got no press conference from the Fed last week.

Finally, the month after the meeting, the Fed minutes will be issued.

These three forms of communication are some of the most closely parsed words in the world.

But when a Fed chair is new, they sometimes make rookie mistakes.

For example, then-Fed Chair Ben Bernanke, who shepherded the economy through the Great Recession and was given credit for keeping the banking system afloat, famously made comments to Fox Business News anchor Maria Bartiromo at a cocktail party in 2006, thinking the comments were off the record.

Little did he know that she would turn around and report his comments to the world…

Current Fed Chair Powell hasn’t, in my estimation, made any rookie mistakes like that.

The closest he has come was at the end of 2018 when he said that the Fed would continue with its multiyear rate hike campaign. But the markets clearly wanted to hear that the Fed would stand ready to cut rates if necessary.

Powell’s comments led to the worst December 2018 equity market performance since the Great Depression. Powell and the rest of the Fed members learned their lesson and promptly began pushing the “Fed pivot,” which led to three rate cuts in 2019.

After a slip of that scale, it’s clear that the statement we received on Wednesday was very carefully worded – so some specific choices caught my attention.

Carefully Chosen Words From Last Wednesday’s Fed Meeting

The Fed left rates unchanged at the Wednesday meeting, keeping the federal funds rate at a range of 1.5% to 1.75%. However, it did make two language changes that caught my eye.

The first: The committee changed language to say we were “returning to 2%” inflation instead of “near 2%” inflation in the December statement, indicating that the Fed might act more aggressively in the future to help push inflation higher.

In order to do this, it would need to cut rates or discontinue the current balance sheet expansion – or both. This slight change in phraseology opens the door for the Fed to do that.

The other notable change in the statement is that the Federal Open Market Committee now sees household spending rising at a “moderate” pace. It previously saw “strong” spending growth.

This slightly nuanced change indicates that the committee doesn’t see consumer spending as strong as it previously did. This also gives the Fed some wiggle room to cut rates in the future, discontinue its current balance sheet expansion or both.

Will the Fed Cut Rates in 2020?

I’m still in the camp that believes we won’t see more rate cuts this year – primarily because the Fed doesn’t want to be part of the debate in the presidential election.

The recent novel coronavirus, however, has prompted huge demand for the safety of U.S. Treasurys, and with that demand, bond prices have risen and yields have plummeted.

A slice of the U.S. Treasury yield curve inverted last Thursday, which of course is a sign that the economy may be tipping toward recession.

For bond investors, though, this shouldn’t create panic

Our tried-and-true strategy of staggering maturity dates and diversifying across sectors – choosing our bonds as carefully as Jerome Powell chooses his words – will keep our portfolio steady and maintain our income even if the economy slips.

Good investing,



Bond Expert Rob Morgan is a former financial advisor who led firms such as Sethi, Fulcrum Securities, Janney Montgomery Scott, Fulton Financial Advisors and Fifth Third Bank.

During his time at Fifth Third Bank, he managed a $160 million taxable bond fund.

He holds a CFA designation.

An MBA recipient from Vanderbilt University and submarine veteran of the U.S. Navy, Rob has made more than 700 media appearances on national networks, including CNBC.

He is also a Contributing Editor for Wealthy Retirement.

You can follow Rob on Twitter @RealRobMorgan.

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