Fed raises rates to 3.75–4.00%, first hike in three years

The Federal Reserve raised its policy rate by a quarter point to a range of 3.75–4.00%, the first increase in three years, First Eagle Investment Management wrote in a note published Oct. 26 by Insurance AUM Journal.

The Federal Open Market Committee voted unanimously for the 25 basis point increase, and the dot plot of policymaker forecasts implies one more hike before year end, according to the note. The 10-year Treasury yield eased through the day, then rose after the announcement to close above 5%. The two-year followed a similar path; the dollar strengthened and equities fell.

For a general account, short paper and floating-rate holdings now price off the 3.75–4.00% policy range. A 10-year above 5% is the yield a new private-credit, commercial-real-estate or asset-based lending commitment has to beat. Both figures apply to new money rather than the existing book, which reprices only as bonds mature and loans amortize.

First Eagle argues that front-end rates are a blunt instrument for this inflation. It attributes the current inflation to supply disruptions rather than excess demand: energy prices, which it expects will stay elevated unless the Iran war concludes in the coming months; trucking costs on everyday goods; and imported fertilizer that may push food prices higher with a lag. The note also argues the Fed has no mechanism to address the deficit, and that the remedy sits with the executive and legislative branches.

First Eagle expects the bond market to stay volatile, citing supply-driven inflation and Chair Warsh's resistance to forward guidance. For a general account holding duration, that volatility lands at the long end, where the 10-year's move above 5% does the repricing.

First Eagle's September note to insurers framed its barbell as a view on the curve's slope. With the front end at 3.75–4.00% and the 10-year above 5%, the spread between them is the number a general account's new-money decision turns on. The dot plot's one remaining hike before year end is what would move it.