Please select your language preference on the right hand side

Languages - Canada

  • English
  • Français
Back
Regions
Language
  • English
  • Français
Skip to signin Skip to main content Skip to footer
Sun Life Global Investments logo
  • CANADA | EN
  • Investments
    • Overview
    • Sun Life Granite Solutions
    • Sun Life Multi-Strategy Solutions
    • Sustainability-focused investing
  • Team & approach
    • Investment Team & Resources
    • Core Beliefs
    • ESG integration
  • News & insights
    • All
    • Insights
    • In the media
    • News & announcements
    • OnTarget
  • Sustainability
    • Commitment
    • Responsible investing
    • Climate action
    • Diversity, equity & inclusion
    • Governance & engagement
  • About us
    • Overview
    • Institutional Business Team
Sign in
Skip to signin Skip to main content Skip to footer
sunlife logo
Sign in
  • Investment solutions
    • Back
    • Investment solutions
    • Investment solutions Overview
    • Sun Life Granite Solutions
    • Sun Life Multi-Strategy Solutions
    • Sustainability-focused Investing
    • Sun Life MFS Diversified Income Fund
  • Team and approach
    • Back
    • Team and approach
    • Team and approach Overview
    • Investment Team & Resources
    • Core Beliefs
    • ESG Integration
      • Back
      • ESG Integration Overview
      • A deeper look at ESG integration
    • ESG Commitment
  • News & insights
    • Back
    • News & insights
    • News & insights Overview
    • Thank you
    • Insights
      • Back
      • Insights Overview
      • Federal Election 2021
      • How to apply an ESG lens to manager selection & oversight
      • Fixed income still matters. And the bonds you pick matter even more.
      • Challenges & Opportunities
      • Key takeaways: Weaponizing Energy in the Russia-Ukraine Conflict
      • Rising inflation can harm portfolios, but real assets can help mitigate the pain
      • Engagement versus divestment
      • Federal Budget 2022
      • Opportunities in sustainable infrastructure
      • The Fed’s race to ‘neutral’ and beyond
      • Q2 2022 | Market Update
      • Q3 2021 | Market Update
      • Q3 2021 Sun Life Granite Managed Solutions
      • Q4 2021 | Market Update
      • Q4 2021 | Sun Life Granite Managed Solutions
      • Q1 2022 | Market Update
      • Q2 2022 | Market Update
      • Fed's single largest interest hike since 1994 challenges an already volatile market
      • Another super-sized rate hike from the Fed; what will happen to riskier bonds?
      • U.S. Fed intensifies the fight against inflation with back-to-back rate hikes
      • Volatile bonds face their first bear market in a generation
      • A deeper look at ESG integration
      • Inflation, slowing economic growth, and uncertainty
      • Climate change affects us all
      • As the Bank of Canada slows the pace of rate hikes, high quality bonds may offer a haven
      • Will market volatility continue?
      • Has inflation peaked and what now?
      • Housing and jobs data point to a looming recession
      • The demise of RRBs in Canada
      • 2023 corporate earnings may be in trouble as consumers lose confidence and inflation fades
      • Bonds: the worst is behind us
    • In the media
      • Back
      • In the media Overview
      • Chhad Aul on tactical asset allocation
      • Demand for oil will decrease however Russia could continue to weaponize it Chhad Aul
      • Why its too soon to get excited for early-2023 rate cuts Chhad Aul
      • Moving to normal size Bank of Canada interest rate hikes
      • Is the investment industry making headway on its ESG journey?
      • How to position portfolios if inflation is turning the corner
      • A look at target-date fund managers’ varying approaches to ESG investing
      • Oricia Smith named among Canada’s Most Powerful Women: Top 100 Award Winners
      • How do central banks pause without looking overly dovish?
      • How can the investment industry achieve ESG clarity?
      • Still cautious on equities but finding opportunities in Canadian government bonds
      • Market sentiment is optimistic, highquality bonds are a good hedge during recessions: Strategist
      • We prefer the U.S. for some sectors, while looking at Canada for others: Strategist
      • To keep inflation in check, overtightening may be necessary, invest in bonds: Strategist
      • Don’t neglect bonds this year despite tough 2022, PMs say
      • Oricia Smith – Changing the face of asset management
      • We continue to stay away from cyclical stocks: Strategist
      • Why this portfolio manager is proceeding with caution
    • News and announcements
      • Back
      • News and announcements Overview
      • Jacques Goulet, President of Sun Life Canada, named CEO of the Year
      • Sun Life announces establishment of SLC Management
      • Exposure change within Sun Life Multi-Strategy Bond Fund
      • Oricia Smith appointed President, SLGI Asset Management Inc. and Senior Vice-President, Investment Solutions, Sun Life Canada.
      • Sun Life Global Investments expands investment management team with a focus on multi-asset solutions and responsible investing
      • Sun Life Global Investments joins the Net Zero Asset Managers initiative
      • Markets evolve So do our Granite portfolios
      • Our commitment to achieving net-zero greenhouse gas emissions by 2050 or sooner
    • OnTarget
    • Q3 2022 | Market Update
  • About us
    • Back
    • About us
    • About us Overview
    • Institutional Business Team
  • signin
    • Back
    • signin
    • signin Overview
    • slgiinst
      • Back
      • slgiinst Overview
      • Sign in
  • Sustainability commitment
    • Back
    • Sustainability commitment
    • Sustainability commitment Overview
    • Responsible Investing
    • Governance & engagement
    • Climate Action
      • Back
      • Climate Action Overview
      • Climate Action Q&A
    • Diversity, Equity & Inclusion
  • CANADA | EN

    Please select your language preference on the right hand side

    Languages - Canada

    • English
    • Français
    Back
    Regions
    Language
    • English
    • Français
  1. Home
  2. News & insights
  3. Insights
  4. The Fed’s race to ‘neutral’ and beyond
Share this:
  • Share this on Facebook
  • Share this on Twitter
  • Share this on Linkedin

Insights

May 04, 2022

The Fed’s race to ‘neutral’ and beyond

With larger rate hikes, the US Federal Reserve is expected to take the federal funds rate to or above the neutral rate of interest to fight inflation. While the fed rate at neutral would neither restrict nor support growth, fed rates above neutral could weigh on both growth and inflation.

Chart of the US Federal Reserve's balance sheet expanding from the year 2007 to April 2022. The Fed's balance sheet double between March 2020 and January 2022.

Source: US Federal Reserve  

Line chart showing the midpoint of US Federal funds target rate between 2014 and 2022.

Source: Federal Reserve via St. Louis Fed

As anticipated, the US Fed raised interest rates by 50 basis points (bps) during its policy meet on May 3 and 4. The Fed hasn’t hiked interest rates by 50 bps since the 2000’s, but with headline consumer price inflation at 8.5%—the highest in over 40 years—this bolder move was deemed necessary.

The Fed also signalled similar rate hikes over the next couple of meetings. With such moves, it appears the Fed is aiming to take the federal funds rate to or above the neutral rate of interest in its fight against inflation.

 

But a neutral interest rate isn’t easy to spot

The neutral rate is influenced by demographics, inflation expectations and productivity amongst other dynamic factors. The measure is so elusive that St. Louis Fed President James Bullard once called it the ‘The Phantom Menace’.

And the menace has only grown challenging since. This time around, in addition to interest rate hikes, the Fed laid out its plan to shrink its balance sheet by around $1 trillion dollar a year, faster than the last quantitative tightening cycle of 2017-2019. The effects of a balance sheet runoff aren’t particularly well-known, but it points to financial tightening.

 

Markets are taking the cues

Amidst bouts of volatility ahead of the meeting, the S&P 500 fell nearly 9.1% and the Nasdaq slid 14% during April. Further, 30-year mortgage rates in the U.S. surpassed 5% for the first time since 2011. A Bloomberg index tracking U.S. financial conditions contracted to -0.73 in late April, the tightest levels since the COVID-19 induced shock of March 2020.  

All said, the Fed’s Summary of Economic Projections released in March forecast a median federal funds rate of 1.9% for 2022 and 2.8% for 2023. The Fed’s median for neutral rate was estimated at 2.4%.  We expect the Fed to be more data dependent on its interest rate decisions after the relatively large initial moves.

 

What does this mean for Sun Life Granite Series of Funds?

Our series of funds remain tactically overweight equities and underweight bonds. In the second half of Q1, we added to our core bond allocation as the risk profile had incrementally become more attractive with the rise in yields. We also added to quality (active management) and tilted our portfolios back towards US growth stocks as we believed to be heading into an environment of slower growth and rising risks.

Disclosure

This article contains information in summary form for your convenience, published SLGI Asset Management Inc. Although this article has been prepared from sources believed to be reliable, SLGI Asset Management Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of SLGI Asset Management Inc. Please note, any future or forward looking statements contained in this article are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this article.

All investment solutions are offered as segregated funds for group retirement plans exclusively by Sun Life Assurance Company of Canada, through Sun Life Group Retirement Services, a member of the Sun Life group of companies.

 

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and Sun Life Financial Trust Inc. 

SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools.

© SLGI Asset Management Inc. and its licensors, 2023. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.

  • Legal
  • Privacy
  • Security
  • Fraud
  • Accessibility

This content is intended for Institutional Investors Only (Plan Sponsors, Consultants & Group Advisors).