Every morning at Cumberland we circulate a spreadsheet of several different interest rates, examine them for changes, and compare them with their historical paths. Below this narrative is an extract of part of the spreadsheet for August 16, 2023.
My interpretation is that market-based pricing is now clearly visible for the next two years. The riskless reference rates like SOFR or fed funds or short-term T-bills are all saying that the policy-setting interest rates will be somewhere above 5% and below 6% for the next two years AND THEN BEGIN TO TAIL OFF SLOWLY.
We believe that market-based prices are the most important indicator we have, and they are far superior to the prognostications of pundits and luminaries who dominate the news flow. Opinions about tomorrow are often based on ranges and estimates. But the media method is to focus on a single point estimate rather than the complexities of the ranges in outcomes.
In the spreadsheet below, one can see the forward rates and how we use market-based prices to derive market-based prognostications. Forward rates are just that — derived estimates of tomorrow’s rates based on market-based prices today.
Note that that doesn’t mean the market will be “right” or “wrong.” It does mean that real money is being deployed at the prices shown, at the time when we extract the price and compute the forward rates.
So, our forecast based on these market-based price methods is that Fed policy rates are centered at about 5.5% for the next two years, with a range of between 5% and 6%.
For investors that becomes a metric to assess options in asset allocation. If you know you can obtain 5% for riskless cash equivalents for the next two years, you can use that reference as a way to compare your alternatives. Cash (and its short-term deployment) has a value now. As of the date this spreadsheet was produced, in our US Equity ETF portfolio, we have currently about 24% in cash equivalents earning a rate of around 5%. Of course, that can change at any time.
David R. Kotok
Cofounder & Chief Investment Officer
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