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The neutral rate – the point at which interest rates neither accelerate nor hurt economic growth – has increased, according to two strategists speaking at the Seeking Alpha Investing Summit on Tuesday.
There’s been a running debate among economists over whether the so-called neutral interest rate has increased in recent years, which would make the central bank’s fast-pace and aggressive rate hikes in 2022 and 2023 less effective than policymakers anticipate.
“Whether people thought it was two, two-and-a-half percent, you could argue that it’s a little higher right now,” Collin Martin, director and fixed income strategist at Schwab Center Financial Research, said at the “Identifying Opportunities Amidst Volatility” panel at the summit in New York City. Projections from Fed officials have “inched up,” indicating a 2.75% level for the long-run neutral rate, he said.
“It looks like the Fed is inching up to that 3% level,” Lindsey Bell, chief strategist of 248 Ventures, said. Before the pandemic, the neutral rate appeared to be at the 2% to 4% range.
An increased neutral rate has implications for the bond market, Martin said. “Essentially, once that rate-cut cycle begins, it probably means it’s going to be a slightly higher landing point.”
The Federal Reserve’s updated dot-plot released last week indicates policymakers foresee one rate cut of 25 basis points this year from 5.25%-5.5%. It previously projected three rate reductions this year.
The yield curve will remain inverted until rate cuts arrive, said Martin, who doesn’t see a sign that a recession is coming from the inverted curve. He also doesn’t expect the 10-year yield (US10Y) to return to 5%. The 10-year Treasury yield (US10Y) was around 4.25% on Tuesday.
“It’s usually a negative sign when the yield curve uninverts,” Bell said. “That’s usually when things start to go wrong for the equity market,” she said, adding that stocks tend to perform well when the Fed is in a “holding pattern”.
The S&P 500 (SP500)(SPY) has shot up more than 14% YTD and has risen after April’s loss sparked by rate-hike worries.
Bell foresees 9% earnings growth in 2024 and said she likes cyclicals, industrial materials and technology and some defensive sectors like health care. Martin suggested investors get exposure to investment-grade corporate bonds where yields are averaging about 5.5%.
Seeking Alpha Editor Liz Kiesche contributed to this story.
