We're in 'a pretty sweet spot' for yields right now, says JPMorgan's Kelsey Berro

Introduces Kelsey Berro, fixed income portfolio manager at JPMorgan Asset Management, to discuss the Fed's rate decision and press conference.

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Kelsey Berro

Main takeaway is the bond market reaction: front-end yields moved significantly higher (pricing in a rate hike), but the 30-year yield moved lower. This means the market believes the Fed has inflation-fighting credibility, and inflation expectations are coming down (5-year expectations below pre-war levels). This is good for bonds.

No one wants rate hikes, but a few hikes now to maintain control is better than the 2022 scenario where the Fed had to hike a lot because it lost control of inflation. The market is saying we are not losing control now.

Challenges the uniqueness of the yield curve flattening, noting it's a common pattern when the Fed tightens. Questions the Fed's ability to control the long end.

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Kelsey Berro

Agrees curve flattening is not unusual. The key point heading into the meeting was uncertainty about Warsh's focus (president's agenda vs. Congress's price stability mandate). He was very clear his focus is price stability, and the market reaction reflected that.

Comments that Warsh is known for prioritizing price stability, possibly favoring a single mandate, given his background with Druckenmiller and Milton Friedman's influence.

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Kelsey Berro

Highlights Warsh's 'Easter eggs': he avoided forward guidance and didn't submit a dot in the dot plot (a missing dot). He is the tie-breaker (9 for hikes, 9 for hold/cut). He described a 'cruel trade-off' between inflation and labor, not believing it's necessary. The Fed wants equilibrium (lower prices, stable labor, rising growth).

Two paths for the next 6 months: 1) Work is done for the Fed (May was peak inflation, oil down, inflation contained to gasoline/jet fuel, labor market moderating from 188k/month average). 2) The committee remains divided.

Jokingly suggests a straddle strategy (fading both hike and cut ideas) to bet on the Fed standing pat.

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Kelsey Berro

Agrees with the 'stand pat' view. Recommends investing in fixed income for the carry/income, not for directional bets on yields. Current yields (5-6%) are in a 'sweet spot' with strong demand from companies issuing debt for innovation/data centers and investors seeking yield.

You don't need to expect lower or higher rates to want income in your portfolio.

Argues that historically (e.g., 1990s dot-com boom), 5-7% yields were not a headwind for economic growth or stock market performance. Questions what the 'right' level is, suggesting the recent low-rate era was an aberration.

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Kelsey Berro

Agrees with the historical context. Notes that current business investment is concentrated in tech. The key question is whether policy is restrictive. Warsh said it's uneven: restrictive for housing, but not for financial markets.

Comments on the benefit of higher risk-free rates for seniors and risk-averse savers who have been 'burned' by low rates for decades.

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Kelsey Berro

Concludes that real rates are currently quite high relative to history, more in line with the periods discussed (1990s).

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