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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
Welcome to the TCW Investment Perspectives Podcast, where
our investment professionals share their insights and
expertise on how to make the most of your portfolio.
I'm David Vick, I'm Managing Director in Fixed Income here at TCW.
All eyes have been on the Federal Reserve this year amid
a growing number of signals that the economy is slowing.
The Central Bank's Federal Open Market Committee has now taken
its first action of 2025, cutting rates by 25 basis points.
As a result, the focus has shifted toward what
the Fed will do for the rest of the year.
TCW's Jamie Franco joins me today as we dive into the
Fed's actions and what it means for investor portfolios.
Jamie is a Managing Director in our Cross-Asset
Research and Sustainable Investment Group.
Before joining TCW in 2015, she spent more than
a decade at the U. S. Department of Treasury.
Jamie, thanks for joining the podcast.
Thanks very much, Dave.
Well, I appreciate you starting with the Fed,
because certainly all eyes have been on the Fed.
You know, the Fed's September cut to, you know, by 25 basis points,
I think was something that was definitely expected in the market.
And if you listen closely to Powell's comments after the decision,
I think this was sort of framed as a risk management move.
We've been seeing rising unemployment, slowing job growth.
I know the fixed income team has been really good at pointing out this no
hiring, no firing, sluggish slowing that we've seen in the labor market.
And while the Fed was focused a lot on potential impacts from tariffs
over the last couple of months, that hasn't really translated
into a more broader sustained inflationary pressures.
So I know at this point, you know, markets are still expecting
a couple more cuts, at least through the end of this year.
There's been some Fed speak lately that says, you know,
maybe this is, you know, they're going to wait and see.
Every meeting is live.
Rates are only a little bit restrictive at this point.
How do you read those actions?
What do you think about the next couple of
months through the end of the year for the Fed?
Yeah, I do think we shouldn't take our eye off the
ball on potential impacts from tariffs, right?
If we rewind the clock, the types of tariff increases across trading
partners that we saw on April 2nd, in some ways, a lot of those
numbers are very similar to what we've ended up with lately.
And whether it was the market getting more comfortable that tariffs were coming
and this was going to be a thing, whether it was because we haven't really
seen, you know, broader economy-wide inflation, you know, vis-a-vis
core PCE and CPI really start to jump in the wrong direction.
Whatever the reasons that the market has gotten a little bit more
comfortable with the idea that tariffs won't necessarily have a negative
inflationary impact, I still think the jury's out a little bit on that.
If you have some one-off increases in goods prices that suddenly, after several
quarters, companies are not as willing to eat, which essentially they have
been either by reducing margin or finding different ways to
absorb those costs, there's going to be an end of the road.
To that scenario and I do think timing is always important.
It's hard to get the sequencing right.
Does inflation come first?
Does weak growth come first?
I do think the caution is warranted.
And so from my perspective, I did appreciate that Powell was very much
talking about this in the terms of a risk management kind of approach.
But, you know, the downside with that is what I think the fixed income team has
been talking about a lot, which is the economy really could be slowing down.
And if that is the case, the Fed is going to have to cut
potentially more than what the market's even pricing in.
That does suggest from, you know, an investment team
perspective, you really do want to keep some dry powder.
You really do want to be investing so that you can very quickly
reallocate to take advantage of dislocations when they show up.
So, you know, appropriately, our teams across asset classes have been very
focused on using liquidity as a strategic lever from that perspective
and having the kind of discipline to be able to reposition portfolios
quickly in very volatile environments that we could potentially see.
Yeah, and that's an important point.
I want to come back to that a little bit.
But first, let me go back to something you said a little earlier.
Obviously, the Fed has a dual mandate.
They have to, you know, make sure that they do their best to make
sure the economy is at full employment and keep prices stable.
For a long time, inflation has been the
dominant driver of their activities, right?
The inflation has been too high, so they've been, you know, lifting rates.
Now, of course, we're finally starting to see signs
that the employment market is, in fact, weakening.
Unemployment has ticked up a little, not a ton.
It's still fairly low, but we're seeing consistent weakness in the payroll
numbers and then ongoing weakness in all sorts of secondary data in
terms of jobs that are plentiful versus hard to get, all of that stuff.
How do you think the Fed balances that inflation-employment dual mandate going
forward, given, you know, some of the uncertainties on both of those fronts?
Yeah, that's the kind of existential question for the Fed, actually.
Certainly, if you zoom out a little bit and look at other
central banks around the world, they actually don't
have a dual mandate like the U. S. Federal Reserve.
This mandate, obviously, was established
by Congress, requiring it to pursue both.
And at times, these factors can be at odds.
So, you know, this is why you're seeing some FOMC
board members prioritizing the labor statistics.
You mentioned a number of them that are really important, and that certainly
we're watching, too, as we see unemployment rise, as we see jobless claims
increase in an aggregate rolling time period, but also that inflation mandate.
The Fed's ability to target labor and maximum employment is a lot harder, maybe
more indirect, as I'm sure we've all heard, monetary policy is a blunt tool.
They have a little bit more success, a little
bit more direct ability to ensure stable prices.
So that's definitely a conversation that I think is worth having, and
we're seeing that play out given this conflict between the two mandates.
So speaking of sort of existential challenges of the Fed, you know, we
talk a lot about Fed independent, but there is the ongoing drumbeat
of you got to cut, you got to cut faster, you got to cut more.
And that sort of pressure is obviously raising questions about
how independent is the Fed, how independent can they stay?
What are your thoughts on how that develops over time and how
important it is for the Fed to remain as independent as possible?
Yeah, maybe let me take the last piece first.
There's been a lot of economic studies on that question and
the centrality of central bank independence to two things,
controlled inflation and stable rates over a longer term.
And there, the studies are really conclusive.
So to the degree to which we want stable inflationary environments, we want to
be able to control a rate setting in the economy, you do need that credibility
and that independence to be perceived by market actors as being real.
So if you put this into broad history, the Fed has
never been completely 100% statutorily independent.
They're still reporting to Congress.
The president can still nominate members of the board.
There are ways in which the political establishment, whether it's Congress
or the executive branch, have a role in the institution to some degree.
Powell has been very measured, I think, in how he's been
dealing with the pressure that the executive branch has
been throwing at him to be very technical about it.
But I do think that the Fed has done a very good job over a long period of time
navigating a political environment and making decisions that are based on longer
term assessment of kind of the economy and making decisions with that in mind.
But again, there is a limit to that.
There will be an action that's taken that starts to erode that credibility.
I don't necessarily think we're there yet.
I think those are all, I mean, important things for us to think about.
But maybe let's take it back from the existential side
of things and more to the practical side of things.
So in your sort of role as sort of the cross asset research, obviously,
when people think about the Fed, they think about the impacts on fixed
income and lower rates and steeper curves and all that sort of stuff.
But maybe talk a little bit about what the Fed, you know, the Fed activities of
recently and sort of going forward, how that impacts other things that we might
be doing aside from the pure fixed income stuff that are kind of obvious.
So obviously, the Fed is easing, whether it's sporadic
easing or the start of a sustained easing cycle, that's
going to be really positive for risk assets, right?
And so you've seen equity markets respond positively to that, I think, to a
certain degree, whether or not that has had an impact on dollar weakness.
I think, you know, the answer could be that since the beginning of the year,
you've seen almost a 10 percent of depreciation in the dollar and the latest
actions by the Fed only kind of indicate that that direction of
weakness is the right one, given where the U. S. economy is.
That's going to provide a bit of a tailwind potentially to certain
emerging markets whose currencies are stronger in relation.
There are different investment opportunities if
you're thinking about now the cost of finance.
So if you are thinking about things like solar and battery storage or some of
the project finance that our teams and different asset groups like looking
at, the economics of those projects or the economics that are being
applied to those sectors now suddenly look a little bit more positive.
So this is why I think focusing on the Fed is the right place, but
definitely we need to have a broader conversation throughout our investment
teams because it does, you know, obviously rates ripple everywhere.
I do want to talk a little bit about its impacts on kind of the consumer, right?
And I think this matters regardless of whether you
are looking at equity market returns or fixed income.
You know, there is a lot of rising delinquencies that
we've seen in existing auto loans and credit cards.
There's been a very sizable reliance on that revolving credit.
So does a 25 basis point cut materially change that?
Likely not.
Does a 25 basis point cut likely change even
the attractiveness of refinancing mortgages?
Also likely not.
And so I do think that even though risk markets are positive, even though I
think from the equity teams are seeing really interesting opportunities in
tech and, as I said, other areas that are now receiving more favorable
financing terms, we still do have to worry about the kind of consumer.
On the lower and on the lower and on the lower and on the lower
and on the lower and middle income levels is really struggling.
And one of the benefits of this cross asset research function is that we spend a
lot of time with certainly those sectors that are very exposed to the consumer,
whether it is because it's through securitized exposure in, you know,
mortgages, residential mortgages or subprime auto, whether it is through
the kind of assets that are asset back finance team in New York.
So I think that's what we're looking at, which is looking at, which have a
tether to the consumer, or whether it's, you know, even our equities teams that
are investing in companies that are consumer, you know, in consumer sectors.
I do think the work that we're doing on the health of the U. S. consumer
and the global consumer is something that we end up sharing across teams.
And then we can benefit with the cross asset insights
that we're able to glean by talking to everyone.
Right.
I think that's those are important things to point out.
Maybe you mentioned the strong performance of risk assets,
you know, corporate credit spreads are at 30 or tights.
They haven't been, you know, at 68 most recently,
haven't been that tight since the mid nineties.
They have to go back a long way.
So clearly they've responded favorably, but it also
means there's not a ton of value there, right?
There's not a ton of opportunity when you're getting
paid very little for taking that kind of risk.
Where else, you know, are you seeing opportunities, whether it's in, across
fixed income assets, across equity assets, across alternative assets,
where, where do you think those opportunities and maybe where
those risks like you to be as we move forward from here?
Yeah, well, let's start with the opportunities
because that's more fun to talk about.
I do think when you're talking about these broader macro
trends, they're certainly an important kind of consideration.
We're investing in long-term secular trends like power
demand and the transformation of the energy sector and AI.
These are things that certainly a 25 basis point cut is not
going to change the trajectory of what we're seeing there.
And so really focusing on some of these long-term secular trends, I
think does give you a little bit of perspective to be able to weather
the year-to-year, quarter-to-quarter noise that we've been seeing.
So that's one in terms of opportunity.
And frankly, it's not just a thematic equity team that's investing in power.
We're investing in power and digital infrastructure across that team, across
what we're doing in securitized credit, where there are really interesting
opportunities in infrastructure, battery storage, solar ABS, data center.
So that's fixed income.
We're also seeing it with some of the companies that we're investing in.
So notwithstanding the fact that spreads are tight, there are some opportunities
with issuers where we have really high conviction because of some of these
longer-term trends in the market that we're seeing where we're investing.
And then certainly if you are looking more into the private asset space, I do
think you have a lot more room to be able to manage some of these macro risks
we talked about because you just don't have that mark-to-market
daily challenge that the other teams have to deal with.
But I do think everybody's trying to find what are
really interesting opportunities out there on the
risk side in terms of how you're thinking about it.
But I do think you are seeing pretty sizable gains in equity markets that maybe
are disconnected a little bit from the realities of what we're seeing on,
as I mentioned, on the consumer or some weaknesses in the U. S. economy.
Certainly looking at things like the growing dependence on
entitlement programs, the budget dynamics don't look great.
The tariff negotiations are by no means finished.
There's a lot of opportunity for volatility, I would say.
But this is where teams are thinking about having that liquidity that we
talked about so that you can deploy it to be a liquidity provider, being
able to have disciplined lending so that you are really trying
to invest in things where relative value is the highest.
But then, you know, we're predominantly an active management shop across
all investment teams and really this kind of uncertain environment, the
potential for volatility, that's where active management really shines.
Yeah, completely agree.
And I think volatility, as always, is good for us, for sure.
So, in any event, that's all the time we have today.
Thanks, Jamie, for joining me.
For more information on TCW strategies, please visit our website at TCW.com.
Thanks for listening.
And we'll pick up next time exploring more trends
and opportunities that are shaping global markets.
Thank you for joining us today on TCW Investment Insights.
For more insights from TCW, please visit TCW.com/insights.
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