Fed ‘could start moving’ on rate hikes at March live meeting: Strategist

Jason England, Global Bonds Portfolio Manager at Janus Henderson Investors, joins Yahoo Finance to talk Fed policy.

Video transcript

BRAD SMITH: Let's get back to the markets as well, as we're tracking in this lower corner of your screen, as you're seeing there, major averages still holding onto gains. We want to bring in Jason England, who's the Janus Henderson Investors global bonds portfolio manager. And Jason, just to lead us in here, I want to get your expectations for what the Fed may signal today.

JASON ENGLAND: Yeah, sure, thanks for having me today. I think Brian stole a little bit of my thunder. I think we're-- our expectations are they're going to play it straight down the middle of the fairway, keeping rates on hold. And really, the things that we're looking at here is the signaling of the March meeting now probably being a live meeting for liftoff, and then the deeper discussion they're having around the balance sheet and what they're going to do with that this time around, how they're going to use that as a tool in order to reduce it. Obviously, it's at a much larger level than it was post-GFC. We're getting close to $9 trillion now in the balance sheet. So that's something that they're going to really, I think, use a lot more this time around and not wait as long as they did the last time.

AKIKO FUJITA: Well, Jason, we're talking about how much expectations have run up and down in this month since that previous meeting. What do you think investors want to hear? What do they need to hear to try to calm some of the jitters we've been seeing?

JASON ENGLAND: Yeah, I think you really want to hear that the Fed isn't behind the curve. I think really, the market thinks that, and a lot of the economists out there think the Fed has been behind the curve on inflation, and they've missed the call on inflation. But there's also the concern if you push it too hard and you start removing this accommodation too quickly, then you could push us into a recession. You know, Brian noted, you know, inverting the yield curve, if you start hiking and you start getting the frontend rate too high and the 10-year doesn't move, then you're going to invert the curve, and you could signal a recession and slow growth.

So I think that's kind of the key here for the Fed, as it's threading the needle. Jay Powell has done a good job. Chair Powell has really communicated well what his intentions are. Now maybe you're going to hear arguments that he's been behind the curve on inflation, and he stuck to that transitory too long. But I think they're in a spot right now where they feel March will be a live meeting. They can start moving that, and then they will start looking at balance-- shortly after one or two hikes, they can start looking at removing some of that balance sheet accommodation.

BRAD SMITH: You know, it's interesting, especially going forward from here, where investors are going to place their own bets, if you will, or more aptly, I should say, some of their own interests moving forward from this point, as they continue to try and time the Fed's decision and how quickly the Fed may make some of those increasing movements to combat inflation as well. So where are some of those sectors, those opportunities that you're seeing investors perhaps pile into even ahead of this decision coming forward?

JASON ENGLAND: Yeah, I think one area is, you know, Brian pointed out the flattening of the yield curve. You can take advantage of it if they start to hike and especially if they hike aggressively, like some have predicted in the market. You know, they're-- the Fed's only showing three hikes. The market is pricing in four. So if they do go that aggressively and if they do start hiking every meeting, then the quarterly meetings, you could see the front end of the curve really move. So you can take advantage of the flattening of the yield curve.

I don't think it will be long-term because at some point, you know, the Fed is going to want a steeper yield curve. So if they start to try to adjust the balance sheet and start to run off the balance sheet and maybe potentially even selling assets, which they didn't do the last time, that could help the backend of the curve and try to control that. Obviously, they don't have as much control over the backend as the front end. But I think they will try to make sure that they don't push it too much where they start to invert it, and we start seeing signs of recession or slowdown in growth.

AKIKO FUJITA: Jason, we've been watching the 10-year and 30-year very closely and pushing a little higher today ahead of that Fed meeting. But how do you think that investors should be looking at the fixed income space? What are you advising your clients?

JASON ENGLAND: Yeah, so for our clients right now, we run a short duration product. It's global, so you want it to be diverse around the globe with different-- all of these countries went down the elevator, Fastly, to-- during COVID back in March of 2020. All the central banks went to the zero bounce. And now you want to see how are they all coming-- exiting out of this. And as a client of mine likes to say, they're coming up the escalator at different degrees.

So really taking advantage of being shorter in duration, not having a lot of duration in countries that are a little bit further ahead of maybe the US or the RBA, the-- in Australia. And you really want to take advantage of having less duration and exposure because if you start seeing rates move up drastically, and the Fed starts to really push the needle here, then you will see fixed income investors can get hurt if you're holding a lot of duration. So you really want to minimize that in your portfolio right now.

AKIKO FUJITA: Certainly some good takeaways there. Jason England, Janus Henderson Investors global bonds portfolio manager, good to talk to you today. Appreciate the time.