Wall Street faces a pivotal macro crossroads ahead of Wednesday's fed rate decision, with benchmark ten year Treasury yields hovering near 5% and crude oil trading above $100 a barrel following an attack on Saudi Arabia's east west pipeline. The rising cost of capital is pressuring everything from borrowing costs to AI infra CapEx, and a fed rate hike is anticipated.
But questions remain over how restrictive monetary policy contain supply driven inflation without crippling economic growth. Well, joining us live to break down the Fed's policy dilemma, as well as well as what we're seeing in the yield curve, is David Busch Trajan wealth CIO. David, great to have you here.
Thank you so much for joining me.
Thank you Remy, I'm glad to be back.
Well, you and I were remarking on the price of gas across the nation before we went live on air. But when we step back and take a look at what interest rates can actually solve. Tell us about where the Federal Reserve stands right now when it comes to the supply side dilemma.
Yeah, really, the Federal Reserve. I mean, it's anticipated the Fed's going to raise rates tomorrow and potentially another 1 to 2 hikes for the remainder of the year. But what the fed can do is raise rates. But all that does is slow demand. And right now the inflationary pressures are really being driven by geopolitical risks, higher energy prices and the supply of treasuries that hit the market.
So when I take a step back and think about it, the fed really can't solve the inflation pressures that we have today other than through pulling back demand from both consumers and businesses.
Yeah. And you brought up a key point there, because we're keeping a close eye on global treasury bonds and in particular yields. And in New York morning trade we are looking at the ten year yield still hovering at that 5% level. So that is important when it comes to what we're watching. So tell us why you're watching both ends of the curve right now.
Yeah. So so the overnight rate is really driven by the Federal Reserve and Fed policy. And they impact the front end of the curve. But further out the curve like the ten, 20 and 30 year is really driven by both, um, the term premium as well as the inflation expectations that are, that are embedded within the Treasury yield itself.
So as inflation expectations continue to stay high, those yields will remain high.
Yeah. In another area we're all keeping our eyes on of course is energy. And it's not just oil prices. We know that WTI and Brant are both hovering around the $100 barrel level. But we're also looking at diesel prices at record highs and also byproducts of this. So although we are concerned about second order effects tell us how this will also impact inflation and growth in the long run.
Yeah. So with with um higher oil, higher gas prices, higher diesel prices, that's going to feed into the rest of the economy and drive inflation pressures higher. So over the long term. When I stop and think about it, it's it's really being driven by the conflict in Iran. So if we had a resolution tomorrow, then those oil and oil prices would come down and that those inflationary pressures would subside.
But right now, with higher rates, that's going to impact everything from borrowing rates, mortgage rates, um, you know, as well as consumer spending, business spending, equity valuations. So higher rates can can drive all of those those other macro factors.
Yeah. And that is not something that consumers or Americans out there want to hear right now, given that costs are elevated already. But when we throw out throw in AI CapEx into the equation here, we know that the headlines are talking about where AI will take us in the next few years and whether we should be concerned about robots taking over.
But in reality, when we're looking at the investment of hyperscalers out there. Where are your concerns when we're looking at elevated yields?
Yeah. So really it's it's going to increase the hurdle rate for that capital expenditures spending. So all of these hyperscalers are building out the AI infrastructure. And so with a higher hurdle rate, that means that earnings can compress just based on higher interest rates and the expenses associated with that CapEx.
Yeah. And speaking of which, I do want to get your perspective when it comes to earnings. It goes without saying that we've been seeing resilience across the board here, but we are counting down to the upcoming earnings season, which will begin in a few weeks. And we just heard from Bank of America CEO yesterday regarding expectations for trading.
But when we take a step back, where do you stand when it comes to resilience versus headwinds?
Yeah. So from a resilience perspective it's really about earnings and earnings growth. And so right now earnings have been have supported valuations. The biggest headwind is going to be really. I think the equity markets will not react favorably if if these large tech companies, um, either miss earnings expectations, even if they have positive earnings growth, but they miss expectations or their forward guidance is below what analysts expect, then we could see some volatility and some potential pullback.
And within the next 24 to 48 hours, there's a lot of anticipation in the market, especially as we count down to a fed chair Kevin Walsh's statement. But we also get the S&P which is the summary of economic projections tomorrow. So what do you think is the most important piece of tomorrow's announcement.
So so tomorrow there's there's a couple of things. One is the actual rate decision which the market expects at least to 25 basis point rate hike. But beyond that in the summary of expect expectations or projections. Really what I'm looking for is inflation expectations. The labor markets seem to be doing fine, but really it's it's inflation and how the fed can impact the inflation rates across across the country.
Yeah. And David finally before I let you go, we are wrapping up Q3 and heading into the last quarter of 2026, which is hard to believe given everything that's happened so far this year. But it's also a midterm election year. And there's a lot of concern about seasonality here when it comes to the broader market.
So what would you say to viewers out there?
Yeah, it's it's it's a fascinating time to be in the market. But I say that almost every day. And and so really what what I think is, is to be patient, think long term, but also focus on earnings and those companies that have sustainable cash flow, sustainable earnings and lower leverage. Because if there's companies that have higher leverage that has to be refinanced at higher rates, then that can be a drag on earnings across the board.
So so be patient X. You know my my expectation is that we can see some volatility. Sure. But but again focus on the health of the actual companies.
And one more question before I let you go. David. So what is the role of bonds, would you say in a portfolio right now?
Yes. So bonds have historically been a diversified and with higher yields. I mean, these are the highest yields we've had, you know, over the last two decades. So really in that 3 to 5 year part of the curve where most investors are. It can act as a as a diversified. And so I would hesitate to to exclude bonds altogether but focus on quality.
If if you know investment grade corporates treasuries agencies because they'll they'll be able to withstand any type of credit risk associated with with higher yields.
Well David, always appreciate your time. Thank you so much for joining us today. And thank you so much for sharing your insights.
Thank you.
Very much. Thank you.
