As the Federal Reserve navigates inflation and employment concerns, investors are left to consider how tariffs and potential interest rate cuts will affect their portfolios. Kathy Jones, chief fixed income strategist at Charles Schwab, suggests focusing on intermediate-duration bonds with strong credit quality to manage volatility.
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So, I I wonder, as you're kind of reading through what we already heard from the Fed this week and what that could do for the fixed income portion of investor's portfolio, how should they be kind of balancing the curve?
Yeah, uh, thanks for having me. Well, uh, you know, I think the Fed is trying very hard to do nothing and making that clear. So, um, they're still waiting for clarity. They're still waiting to get closer to their goal of lower inflation and hold on to the employment outlook. And, um, for them, you know, they're they're caught in a hard place here because the tariffs could certainly push up inflation, and if that inflation becomes persistent then they'll have a problem on the inflation side. And then, you know, we have the potential for tariffs and retaliation to reduce employment. So, tough spot for the Fed. Um, in terms of investors, we think that the best spot to be right now is in sort of the middle of the the yield curve. Say up in credit quality, stay five to seven years on average duration. And that gives you enough yield to compensate for, you know, waiting. Um, you're not caught. If a Fed does cut two or three times this year, then if you're too short, you're going to have reinvestment risk, you're going to miss capturing some of these yields. If you go too long, then you're caught in the turbulent, um, news flow on tariffs, and you get a lot of volatility, and if inflation does pick up, the long end's going to be the tough spot to be. So, we kind of like intermediate duration, we want to stay up in credit quality because there is a risk to the economy and lower credit quality sectors of the market if tariffs cause a big slowdown in the second half.