I've been doing much thinking lately on interest rates and the whole economic landscape. It's a trendy subject with much buzz, and not too long ago, I saw one particular perspective by Skip Schweiss, CEO of Sierra Investment Management. What he had to say resonated with me, and so here is my take on his material.
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First, Schweiss makes a strong case regarding the ability of investors to listen to the Federal Reserve or the Fed. For many years, we've gotten so used to having these meager rates, especially for those who started investing post-Great Recession. It almost felt like these rock-bottom rates were average. But this is what Schweiss reminds us is so unusual historically about these rates. Despite currently being at a two-decade high, the long-term history of rates is near average. It's interesting to think about how our expectations can be influenced by recent history. Most of us have wished for a rapid return to the low rates of the past decade. But Schweiss tempers those expectations.
He adds that investors should instead be ready for these rates to go higher for much longer. That view is informed by where the Fed sits today. The Fed intends to reduce rates once this year, says Schweiss. That is a deep slide from the three cuts they originally foresaw. This is primarily because inflation is still a concern, and any future rate cut decision will heavily rely on cooling inflation data rather than market expectations.
What made this home for me was Schweiss's comment about the broader economic implications of it all. For rates to fall back very quickly into that pre-pandemic range would require significant financial distress, he said. That is a sobering thought: be careful what we wish for because regaining those low rates again might entail substantial economic pain.
It gets even closer to the U.S. elections, and Schweiss believes that dramatic Fed moves will be put on hold. The appearance of independence is paramount, particularly in an election year. Thus, as much as we may wish for policies that would favor lower rates, most of its moves will be conservative to avert any perception of political influence. Also, with inflation still above target and the economy relatively robust, aggressive rate cuts will likely not happen anytime soon.
Another point that Schweiss made that, in my view, was crucial is that many provisions in the 2017 TCJA are set to expire; the election can determine whether or not these provisions can be extended or expire. This inserts a degree of uncertainty into the job of financial advisors and that of their clients as well. Along with this is Social Security, which is always a hot topic due to its projected insolvency date beyond 2030. Schweiss does view that fix as having to be holistic, which could include tax increases, raising the retirement age, and some sort of means testing for high earners.
These put into context how complicated things will be going forward in policy. As these economic discussions continue, Sierra Investment Management, under Schweiss' leadership, is changing with the times. It started as a fixed-income mutual fund company but has grown its equity funds and is now expanding into the exchange-traded funds area because of the demand for lower costs and tax-efficient ways of investing. It's an exciting development to see how investment management firms are changing to meet their clients's needs.