The document provides an overview of recent interest rate movements and expectations for further rate hikes by the Federal Reserve. Short-term rates in the US have risen over 100 basis points in the past year, while longer-term rates remain lower, resulting in a flattening yield curve. The Fed projects stable economic growth and inflation through 2020 as it gradually raises rates, with market expectations that rates will peak at around 2.8% in 2019. Rising interest rates can slow economic growth over time as intended by the Fed to manage inflation, and an inverted yield curve has historically preceded recessions.

1. Market Perspective – September 2018
Experience Insight Impact
Overview: Interest rate movements continue their upward march. Since last year, the yield curve
has continued to flatten with short term rates rising by over 100 basis points. The implications of
interest rate changes are often underappreciated by investors. This month, we look into recent
interest rate moves, future expectations for further actions from the Federal Reserve, and the
potential real world implications of such changes.
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2. Current Environment (10-Year Yields)
Experience Insight Impact 2
The 10 year treasury note in the United States hovers above 3%, while most of the developed world maintains rates substantially lower.
Source: Bloomberg

3. Current Environment (2-Year Yields)
Experience Insight Impact 3
Shorter term yields around the globe remain negative in many cases, while the U.S. has seen rates rise dramatically.
Source: Bloomberg

4. Federal Reserve (“Fed”) Expectations
Experience Insight Impact 4
• The top table shows Fed projections for economic growth (Real GDP as a
proxy), Inflation (Core PCE as a proxy) and the Unemployment Rate. As you
can see, growth remains reasonable, with inflation largely under control
despite very low projected unemployment through 2020.
• The next table, as well as the graph, demonstrate the expectation for
continuous rate increases from the Fed over time. Longer term, however,
the Fed believes the median target rate should be 2.875% (vs. 2% as of
9/17/18).
• The market, represented by Fed Funds Futures (as of 9/17), suggests that
rates will rise to around 2.8% during 2019 and not rise further.
• In summary, by the Fed’s own expectations (and the markets’), we will
approach the end of the rate hiking cycle within the next few years while
the economy is projected to remain stable with inflation under control. Source: Bloomberg

5. Why Do Interest Rate Levels Matter?
Experience Insight Impact 5
Over time, increasing interest rates will likely cool economic growth. The Fed attempts to control economic growth (and inflation) and
keep money flowing at a “goldilocks” pace (~ not too hot, not too cool). If this process is managed effectively, cycles can be prolonged.
Source: https://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/

6. A Reminder On Yield Curve Inversions
Experience Insight Impact 6
Several months back we showed
a chart of the prior instances
where short-term interest rates
exceeded longer term interest
rates. This “inverted yield curve”
has generally preceded
recessions.
This chart shows the significant
flattening of the curve in the
green line (although not
inverting) which has been
occurring since the end of 2016.
While short-term rates have risen
by more than 150 basis points (~
1.50%), the 10-Year has risen by
just 50 basis points (~ 0.50%) and
the 30-Year has been essentially
flat.
We are closely monitoring this
trend as a possible early indicator
of future conditions.
Source: Bloomberg

7. Market Perspective – September 2018
Experience Insight Impact
Conclusion: While investors frequently hear the drumbeat of stock market news from various media
sources, below the surface, interest rate movements are silently leading the charge. Individuals,
corporations and even governments around the globe are impacted with every tick of the bond
market. Central Banks around the world are trying to control inflation and economic growth primarily
with the powerful tool of fixing interest rates. As conditions dictate, we will transition portfolios to
the appropriate mix of securities based on the existing and forecasted rate environment.
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8. Disclaimer
Experience Insight Impact
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.
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