Nottingham Trust advisor talks interest rates, inflation

Interest rates and inflation have been on the minds of almost everyone, whether you’re a business owner or a consumer at the grocery store trying to feed your family. According to one expert, there may be some relief in sight soon. The period of the past several years has truly been a unique experience, says Karissa McDonough, senior VP, fixed-income strategist with Nottingham Trust, a division of Community Bank, N.A. “You had an economy that essentially came to a screeching halt,” she says regarding the economic shock of the pandemic era. It was uncharted water for the Federal Reserve, which was, by default, the only player left in the game for a time. Armed with lessons learned during the 2008 financial crisis, the Fed took steps to promote quantitative easing. In simple terms, it means putting more dollars into the system to spur people to spend and invest it. At the same time, the Federal Reserve dropped the federal funds rate — the interest rate that banks charge each other to borrow or lend excess reserves overnight — to practically zero and had to leave the rate low as it waited for consumer confidence and spending to return, McDonough says. Then as consumers started to spend on goods, the economy rebounded and supply chain issues cropped up, which helped cause prices to jump. “Inflation started to just take off,” she says. The Federal Reserve responded by raising interest rates in a series of 11 rate hikes over a period of about a year and a half (2022-2023). That brought rates to 20-year highs and started concerns about a recession. For businesses, both inflation and high interest rates have caused concerns, making it more expensive to operate and attract customers. Everyday consumers have seen the crunch at the grocery store and most places they shop as prices rose to match the rising cost of doing business. Those concerns were heavy at the end of 2023, especially because this was such a novel situation, McDonough says. So, how does this end? Typically, an economic cycle ends because of a big macro event, but in this situation, the cycle started because of a macro event — the pandemic. McDonough is less worried today about a recession than she was six months ago. “Now I’m sort of thinking it goes one of two ways,” she says. The first is a “soft landing” of sorts where inflation settles somewhere around the “norm” of 2 percent allowing the Federal Reserve to incrementally lower interest rates until things balance out. The second possibility is continuing small pockets of volatility, especially in areas where private credit options are in play. Another concern going forward is the vast amount of commercial real estate as offices sit empty while people continue to work remotely even after the pandemic, McDonough says. For investors, some volatility remains, and she cautions against making rash moves. Now is a good time to reassess your portfolio and make sure it’s well balanced. “Treasuries are super attractive right now,” she notes of investment options. Treasury bonds are currently paying rates of 4.5 percent to 5 percent, she says. Government-backed mortgages are another attractive investment option at the moment for those considering portfolio changes. Going forward, McDonough says the expectation is that the Federal Reserve will make at least one if not two rate cuts before the end of this year. “I believe the federal policy is working,” she says regarding the Fed trying to create a soft landing. Nottingham Trust and Community Bank, N.A. are business lines of Community Financial System, Inc. (NYSE: CBU), a DeWitt–based banking and financial-services company. The company also operates Benefit Plans Administrative Services, Inc., a benefit-administration firm, and OneGroup NY, Inc., an insurance subsidiary.