Amar Reganti dives into the Fed’s next move, the impact of Trump’s “One Big Beautiful Bill,” and what it all means for your fixed income strategy.

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Hi. I’m John.

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Ammar, welcome back to the Human Centric Investing Podcast. It’s great to see you again.

Thanks for having me back John.

Well, you know, Amar, it’s been now about six months since President Trump has been in office and obviously there’s been a lot of proposals, a lot of change, some new legislation, so on and so forth, but overall in this first six months, how do you think the fixed income market has reacted so far to President Trump’s presidency?

Uh, the fixed income markets reacted sort of in line with, uh, uh what I’ll call like the volatility of the policy announcements themselves. So if you recall, uh in early April, uh upon the announcement of the liberation day tariffs, we had a dramatic, uh sell off and steepening in the fixed-income markets. Uh, there was a number of reasons for that, but the volatility was sort of fueled by the unexpected nature of the announcement. And that led to what you’d call a portfolio rebalancing, not just here in the US, but around the world. And that proved to sort of be what you almost call a red line for the administration in terms of how quickly they could implement the policy changes that they wanted in trade terms. So we’re still in flux there, but the markets now seem a little bit more inured to sort-of sudden announcements. I would say the second sort of big piece of this that’s happened already is the passage of the one big beautiful bill, which is one of the largest reconciliation packages passed in modern history, which extends the tax cuts from 2017 and makes them permanent as well as gives several other tax cuts to the broader public. But of course, there’s a financing mechanism to that. A significant portion of that is likely to be deficit financing. And another portion of that is likely to be cuts to some social programs, particularly on the healthcare side, but aren’t going to be phased until around 2027.

So Amar, I think as all of us kind of followed the headlines about what it took to get that legislation through, we learned about some of the concerns about the deficit spending as you mentioned. If you had to quantify it, what do you think are the most impactful provisions of that bill as far as a fixed income investor should be thinking about?

Yeah. And, you know, if we just sort of move back a little bit in time, sort of ahead of the big announcements of the administration, the year we were looking at was was relatively what I’ll call smooth. You were talking about a world where the US economy was very strong still, but the labor market and inflation were gradually cooling. The Federal Reserve was going to be very well positioned to deliver a series of cuts across 2025 and into 2026. And That boat’s been rocked a bit in part. The tariffs remain a question mark, obviously, as I said, in terms of the inflation passed through. And we expect to see some of that start showing up at year-end data. But the second is, in term of the bill, the bill is what we call mildly to moderately stimulative to the economy. And that sounds all well and good, obviously. When you hear those that terminology but it’s coming at a time when the US economy is actually in a relatively good spot. So what we’re doing through passage of the bill is continuing to accelerate growth and being stimulative to growth despite the fact that growth is in relatively good shape. Now that has a knock-on impact in terms of what you’d expect the mismatch between demand in the economy and supply in the economic of real goods and services. So what do we expect that bill to do also? Uh, is to, you know, make, uh, but help plateau or even move up inflation, uh as we kind of, as the different parts of the bill are implemented. So like the, the two big kind of takeaways, if I step back from the bill is yes, there’s likely to be stronger growth. Uh, but that’s coming at a time when growth is still pretty good, but it’s also likely to have some inflationary, uh impacts as well. And that, what that does is you’re starting to on an economy. Relatively hot with strong growth and higher inflation, and that balance is one that’s really hard to maintain for long periods of time.

You know, staying on the one big, beautiful bill for a moment, I remember as we were moving through it, I read an article that said something about, you know, deficits have always been with us, but Wall Street is finally noticing. I guess my question, aside from the growth and inflation issues is, what do you think the impact is medium and long term to deficits and should we as fixed income investors be concerned about that? Is it time to be concerned about it or is it kind of more the same that we’ve been dealing with for the last 20, 30 years?

Yeah, so that’s a great question, and you know, to some degree, I think the headlines have never really been complacent about deficits or debt. You see it every few years, right, whether it’s on the cover of the financial press or the popular press, like, you know time magazine cover. So it’s a it’s something that’s very talked about. But the pricing never really reflected deficits, right. And they are beginning to now. But the question, of course, is, well, why now? Large numbers we’re talking about, but if you look globally, for example, the stock of debt is much higher in many other developed countries. For example, in Japan, which has substantially more debt, but also relatively lower government bond rates. The reason why deficits are being pulled to the forefront right now is that they’re occurring at a time when inflation is still above the 2% target that has been outlined by the Federal Reserve. If this type of deficit spending was happening at a time when inflation was well below that or we were in what we call recessionary conditions, it’s unlikely the market would have the same reaction or pay attention to metrics around debt sustainability. But the fact that it’s happening in a pro-cyclical manner rather than a counter cyclical manner is what’s really got the markets like attention. It’s that you’re doing it significant deficit financing at a time. When you’re already above target on inflation and likely, you know the addition of the provisions of this bill is likely to You know help push inflation and growth higher and That leaves the monetary policy authorities a bit of a bind because they have a dual mandate One is is to get inflation to two percent And the other, of course, is to try to engage monetary policy to have full employment. We’re still at relatively full employment, but the inflation metrics haven’t been met. So when you have that, plus the stimulative amounts of tax cuts that are coming through the bill, what you’ve done is you’ve caught the attention of the fixed income market. And you’re seeing this reflected in what I’ll call weakness in the 30-year part. Of the curve. This is a term we utilize is called the term premium, which is the additional premium fixed income investors need to have in order to sort of deal with the risks of unexpected or ongoing or continuous inflation. And that is beginning to manifest itself in markets. And it’s something that’s going to be challenging for the administration to sort of manage against the backdrop of a bill of this scope and scale.

So let me go back for a minute to something you mentioned about tariffs. And you were mentioning about you were expecting that we would feel some of the impact from tariffs as we get closer to year end. So my question to you, and maybe the answer is in that, is that at Independence Day, when all these tariff policies took everybody by storm. There was a rash of economists obviously came out and said this can be terrible for inflation, so on and so forth. Inflation has been fairly muted, I think, even those same economists may agree. Is it too early to declare mission accomplished? Or, you know, how should we be thinking about the ongoing impact of tariffs? I know new trade deals are coming in all the time. How do you look at it?

So, great point. I think when looking at inflation, and impact of tariffs, it’s a lot like comedy. It’s about timing, right? And one is, is what we do know is looking at the data is that US corporations did an enormous amount of inventory at the beginning of the year and midway through the year. They knew that to some degree tariffs were coming. So the best sort of way to protect yourself against tariffs in the near term is to stock. And you saw that that enormous pull forward of purchases to stockpile. So in the near term, a lot of the pass-through you’d see in tariffs is muted by the inventory effect. The second thing is, is that the terms of the deal, you know, continues to change, as you know like, and as, as those terms change, you don’t want to necessarily change pricing based on the terms changing on what’s a month-to-month basis, that’s gonna alienate customers, suppliers, your own sort of supply chain dynamics. And particularly also a lot of your wholesale deals are probably what you call longer-term contracts. So there is some time before they roll over. So you kind of put those three together and you could not expect tariffs once announced to immediately start showing up right away. They can in some industries, right? Which, you know, might have more nearer term. Trade dynamics, but in the broad sort of swath of industries you would expect that to slowly and unequally filter in right like if that makes sense It’s just imagine you’re dribbling water down like a rough wall Like you’re not like a smooth vein But a rough Wall and the water is coming down like at different speeds at different places You know the walls sort of going to get wet Eventually, but different segments of it are going to wet at different times and it’s going to show up, you know in the data a little differently. I think we’re starting to see some of the green shoots of that in the last CPI data where some of goods inflation looked relatively driven by tariffs. Can’t say for 100%, but that’s kind of what it looks like. And additionally, as we look at import price data, what we can see is that a lot of importers aren’t eating the costs of it, meaning like their own import costs haven’t changed. That means sort of by definition, they have to they have to pass that on. So again, you know, there’s this the play here is time. And I think anyone who just says, you know, tariffs are going to be immediately inflationary, like that’s that nothing works that simply for obvious reasons, right? If you’re a retailer, and you have a two or 3% margin, like chances are you’re going to pass things on and if you’re A company that has a 15% margin, like you might not pass all of it on. So again, unequally. But the reason why near the year end is important is that a lot of that inventory starts to bleed off, and then you start seeing those sort of price points like change. It’s very hard to model it out, but you know the direction it’s gonna go in, and it’s quite hard to say the timing in the near term. But you also, again, know the direct of travel, that things sort of have to play out that way.

Amar, in the past couple of months, the US lost its final AAA rating. I guess it was Moody’s that downgraded US debt. Whenever that happens, we start to hear rumblings about reserve currency and so on and so forth. Are these legitimate concern? Look, I know you don’t have a crystal ball, but how excited should we be or cautious should we be about the talk about future reserve currency status so on so forth? Is there validity there?

Like, as in most things in markets, John, you have to sort of have a balanced take on it, right? Which is, you know, it is something that you shouldn’t just brush under the carpet and say, like, it doesn’t matter. It matters not because a rating agency says that, like the rating in effect is an output of their own methodology, right. And so we’ve had three rating agencies since 2011 remove the AAA status. Two of them have done so because what they consider. The dysfunction in the fiscal and institutional processes of U.S. Economic policymaking, and that was S&P and Fitch. Moody’s, on the other hand, points primarily to the debt statistics, but says the floor, the reason why it didn’t move worse is because thus far U. S. Institutional dynamics have held, even if they’ve been stressed. But if they do get stressed past a certain point. You could imagine that rating also could be jeopardized to go a notch or more lower. So what the agencies are sort of gleaning from all of this is that yes, from their metrics, the debt is large, but they would have given more leeway if they saw a more bipartisan dynamic occur in the budgeting appropriations and tax policy process. Uh, that you see, uh, you know, in Washington and that, that bit of sort of qualitative goodwill is, is kind of been at least at two out of the three agencies has, has sort of been gone. Now that’s important, but at the same time, it doesn’t change a number of other things, which is, uh the United States is still one of the world’s largest economies. The treasury market is still on of the deepest and most liquid markets in distance. You know, within the US, even if we’re running slightly higher above inflation, you know we’re right now talking north of 2% versus a 2% target. And of course, you know, the bond geeks love to kind of look at that difference. But if you sort of step back, you’re like, wow, it’s, you now it’s it’s not substantially above target. And you also have the scope and scale of the rest of the US capital markets. So it’s not easy to quite replace your U.S. Allocation. Like in, you know, if I can use the term in, in the movie Moneyball, where you can’t replace the US, but you can recreate parts of it in the aggregate. You know, that diversification trend is likely to be ongoing and continue in the next several years. It doesn’t mean we lose reserve currency status. I mean, there are certain steps that that could accelerate that process, but it probably leads to a world down the line in our sort of investing lifetime where we have probably more of a multilateral currency regime. And capital markets developing other countries that are large and sophisticated and can handle the inflows. And that’s different from the world we grew up in, which was sort of the sheer dominance of the US dollar. There’s definitely implications around that, but that is what I’ll call a slow moving train. That is not something intermediate. That doesn’t mean something you go and change everything in one day. And that what I mean by sort of a balanced kind of perspective about the evolution and cycle of you know, our capital markets and the dominance we have in global capital markets.

Some are the one word that fixed income investors hate to hear. Stagflation, something that we hadn’t heard for years. Now it seems like it’s being talked about more. Can you just share for our listeners kind of how you think about stagflations? What is it? What are the risks? Why now is it a concern in the economy?

Absolutely. So again, you know, it’s always good to level set, like when you and I talk about stagflation, it’s very different from the stagflation of our predecessors in capital markets, right? The stag-flation that they’re used to was a time of almost double-digit inflation and zero to negative growth. The staghflationary trade-off we’re sort of talking about here is one of modest growth. Higher than expected or above target inflation. So you can imagine US growth in the, you know, like there’s different consensus, the OBBA, I mean, the OBB passage probably is relatively stimulative. We think it adds just under 1% to US growth over the next 12 months. A lot of that front-loaded into this year. So you could say, you now, we’re probably above, you know 2%, you know versus pre passage of the OBB in terms of growth. But it’s also likely the tariffs plus the nature of the bill probably push this as above 3% in inflation. So what you’re getting is a world that we’re not super used to in the US. We briefly were during the latter parts of the pandemic, a world where we have inflation running relatively higher than growth, not by an enormous amount and certainly not from the perspective of our forefathers. But it really does tell you that the world that’s evolving is one of modestly higher inflation and modestly, you know, okay, slightly weaker growth, but still, you know, OK for a developed large economy. That’s not the worst thing in the world, like necessarily for the fixed income market. I mean, if you look at where the 10 year is priced, you’re in the, you know, relatively like in the sense of around the four percent range, right? And, you know, our view is we’re likely to be range bound for a while and, uh, 4%. And then if you add in, uh given the relatively healthy credit conditions in the U S economy, you add, in, you know, 100 ish or more basis points of spread just for high quality credit. And now you’re, you’re well into the 5% sort of magical number of yield, which is what a lot of people sort of target or need on a compounding basis over time, and that’s, that’s a pretty good expected return. So. The market isn’t oblivious to this. There are certain sectors in the fixed income market that are that are priced well for this. There’s other parts that are approached with a little bit more caution. That means you should be active, obviously, in your fixed income management. And then, of course, I think to U.S. Investors, like it’s always sort of we know we we have this even this bias of just looking at U. S. Bond markets. And I think that’s very outdated. Right. I think you. You have to like kind of wake up and smell the fact that the global bond market is now a diversified and vibrant place that offers you, you know, yield once again, as rates have gone up globally, but also offers you differentiation in terms of economic conditions, but can still serve as that anchor to win with winward asset class. So, so I think that the last leg of that besides like, Hey, the yields look pretty good. You know, number two, make sure you’re active, is number three, make you’re diversified. Like, spend time on that and look at strategies that can offer you that diversification. And I think all of that is a very healthy fixed income allocation at a time when you’re being paid like, you know good portions of income.

So, Amar, let me switch gears a little bit and talk about the gang that has to try and figure out where the economy is going in terms of interest rate policy. And I’m talking largely here about the Federal Reserve Chairman Powell and the relationship with President Trump since he’s been in office. I mean, I don’t think President Trump has been shy about sharing his opinion about Chairman Powell said he already won’t reappoint him next time. Uh, and there’s even interim challenges, like a shadow fed shadow fed chair, who are the players if he doesn’t appoint all this, how does the fixed income market, how has it reacted to this kind of relationship between the fed chair and the president?

So that’s interesting. In early April, after Liberation Day, there was a couple of drivers of what drove fixed income market weakness in the early part of that month. Certainly the unexpected nature and the size of the tariff announcements was one. But the second was markets precipitously weakened as the rhetoric sort of increased from the White House with regards to Chair Powell, to a degree that I think should have proved alarming. Uh, to treasury and white house officials. Uh, you know, look, the bond market is, is the rules of the game in the U S fixed income market and treasury markets are that the central bank is an independent entity, uh, with a dual mandate, with the perceived set of rules. Uh. And you know on the, and while I’m not a lawyer, so of course we should all take this with a grain of salt, uh. In Trump v Wilcox, the Supreme court appeared a recent decision appear to make a, a special carve out for the nature and unique structure of the Fed, which likely preserves, you know, likely gives Chair Powell sort of the legal upper hand in the courts if the White House decided to terminate him before the ending of his term as chair in May of 2026. Any sort of move to do that ahead of that schedule would likely be, one, a very challenging legal fight that could draw out, And two, would not just undermine. Know, the US fixed income markets, it’s likely to undermine all capital markets in the US because to some degree, they’re anchored. At the current time, it appears there is some movement in Washington based on the Fed’s renovations to their building, saying that that could be a pretext or cause for removal. Again, that’s very challenging. All of the changes occurred, you know, with the approval of the politically appointed members of the commission who were care to. Oversee that, and then secondly, given the sort of rhetoric about lower rates that were wanted by the White House, it’s very likely in court that that could be seen as an excuse. It’s a high hurdle to kind of get there, especially when you add in the fact that the term ends in May of 2026 and you can begin the process of thinking about Fed shares already. Now a shadow Fed share, as you noted, John, I don’t think that would actually be that impactful in part because the entire FOMC has to make a decision about interest rates. The chair kind of sets the tone, he can drive the agenda, but the reality is there’s a vote and that vote is what’s gonna determine interest rate policy. So uh It’s what I would consider a tail risk. It’s something that should be somewhat of a cause for concern among all market participants. However, I think given the sort of relatively short amount of time before the White House gets its own pick, as well as sort of the legal protections that Powell has in place, I consider it a smaller tail risk, but it’s a volatile policy time, and I can’t say that 100% for sure.

So it definitely sounds like the risk to Fed independence is the bigger issue than who the potential new Fed chair would be. We can wrestle with that one. Maybe in coming months would be what I’m hearing you say.

Yeah, that’s correct. And, you know, to some degree, it appears that the leading candidates for the chair right now would be, you know, Kevin Warsh, our former FOMC governor, Kevin Hastert, the current chair of the NEC, as well as... Christopher Waller, who’s a current governor and former head of research for the St. Louis Fed, you know, all three of them have stated a preference for lower rates over time. Waller is probably the one who’s probably offered the most sort of empirical evidence that he would accelerate the rate cutting process, but it does seem to me, you know that the next appointee will be will be a dove. In terms of, or at least will have expressed dovish sentiment, and then it’s their job to try to convince the rest of the FOMC to do it. So even the appointment of a singular chair, again, it could set the direction, but that person has to be able to convince all the rest to the FomC, and I think that’s really important to know. So you need to make sure someone who’s put in that seat can credibly execute that. Otherwise, it’s likely to just isolate the chair and make them ineffective in doing their job.

Yeah, so I think it’s effective to anticipate what possibilities are out there, but let’s talk about the current board in place, the current Fed chair. And the outlook for interest rate rises or cuts. So the market, I think, is expecting two cuts in 2025, the remainder of this year. But I guess my question to you, Omar, is, is that a done deal? Or do you think there’s a potential risk for possibly even a rate increase? And is two the right number in your mind? I don’t know, what do we think?

Uh, I think, I don’t think it is a done deal. I think the bias of some members is to begin the process of, of having a cut because their concern is if you actually hit the 2% target, uh, and the labor market has weakened your problem, you could be lagging, so it’s to somewhat get ahead of that and something Mary Daly, the president of the San Francisco Fed opinion she expressed recently. Uh, but of course the challenge is if you continue to see prints in inflation that are above target, it becomes challenging to execute all of those cuts that are currently priced in. When you say is there a risk to a hike, I view risk as what’s not priced in, and the market really hasn’t priced in the possibility of a hike. It’s not talking about it, it’s not in the chatter. That would be something that comes sort of out of left field, and it would probably be a disappointment to the Fed themselves because they’ve already started a cutting cycle. They just sort of pause. To see how inflation and the labor market proceed. A hike would mean, you know, you have what’s effectively, you know a substantial amount of inflation coming down the pipeline. And it’s starting to show up in the data in a way that’s growing very concerning, like significant portions of the basket are beginning to trade above that, you know average 2% level. And that’s not priced in. It’s not a risk I would take off the table. I think it would. It would lead to a lot of consternation across the government for obvious reasons and within the Fed. But again, you know, if you have a dual mandate, a legally a dual mandate that Congress has put in, you have to somehow adhere to it. I don’t view that as my base case. I think the base case is they just don’t get as many cuts in as as the market’s pricing over the next couple of months. And and because of that, they’re going to be a little bit slow. And that’s okay. You can always accelerate a little bit later if the data comes in. But yeah, I do think that the market’s being a little aggressive in its pricing right now.

So Amar, as we wrap up this episode. We’re currently in the summer months. Summer is hasting on. Financial professionals will soon be back out in front of their clients as the fall push comes on. Everybody’s back from vacation, so on, so forth. What are one or two takeaways that you think financial professionals ought to have in the forefront of their minds concerning the fixed income markets over the next several months? Given everything that we just discussed about tariffs, economic policy, you name it, the Fed direction, so on and so forth, what are a couple of bullet points that you think we should be mindful of when speaking to clients?

Yeah, right away, I mean, and I’ve said this now, you know, for a number of months, probably, you know, a couple of years now, like, the yields are attractive, right? That’s the first and most important starting point in fixed income. Over the long run, that’s one of the most sort of largest factors in what you think about in expected returns. Number two, the US economy is still relatively healthy. And that means credit markets in the US are relatively healthy, So not just, you know, government securities, but, uh, you know, there is, uh. The credit markets sort of offer an opportunity set on a yield basis. Number three, you should be selective. Certain strategies, actively managed strategies are going to work better for your portfolios. It’s important to be mindful of that. And number four, I think the most important thing is that you should look at diversification. I know it’s better to have three or five points, but I have four. That’s all good. Yeah, and I think that’s gonna give you sort of a fruitful, you know, number of paths to pursue when you think about the bond market. And I think it’s gonna be helpful to your overall asset allocation.

And in terms of that diversification, it sounded to me from your earlier comments that you think international is an area that’s fairly neglected and people ought to at least become more familiar with it if they’re not already.

Yes, I think it’s worth spending the time and of course I’ve talked about international as one big, you know, one sort of diversifying element of this. But the others are, you know there are strategies that will decide it’s the right time to be in credit and not the right, it’s more, it’s better to be government securities and I think you should have that sort of dynamic ebb and flow toggle and because I think that it’s something that’s going to be useful in this type of environment. And then like three, like I think a lot about this comes from a non-tax perspective, but the Muni market itself, just from a ratio perspective, looks pretty interesting and attractive. The credit quality and starting points of Munis are really healthy. Again, I think you need to be active there because there are some segments of it that are going to be hit by the impacts of the One Big Beautiful bill and other segments that are gonna be not as impacted or possibly benefit. And again, that’s where that active manager can kind of think about what the policy implications are going forward.

Well Amar, as always, thanks for your insight. I’m sure the financial professionals listening today gained a lot from that and you’ve given us a lot to think about. So thanks again for joining us on the podcast.

Thanks for having me back on, John.

All right, we’ll talk to you soon.

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OBBA refers to the One Big Beautiful Bill Act. Municipal securities may be adversely impacted by state and local political, economic or market conditions. Investors may be subject to the federal alternative minimum tax as well as state and local income taxes. Capital gains, if any, are taxable. Foreign investments may be more volatile and less liquid than U.S. Investments. Diversification does not insure a profit or protect against a loss in a declining market. The views expressed herein are those of Wellington Management are for informational purposes only and are subject to change based on prevailing market, economic, and other conditions. The views express may not reflect the opinions of Hartford Funds or any other sub-advisor to our funds. They should not be construed as research or investment advice, nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part for any purpose without the express written consent of Wellington Management or Hartford funds. Mutual funds are distributed by Hartford Funds distributor is LLC, HFD, member FINRA. Certain funds are sub-advised by Wellington Management Company, LLP. Wellington Management is an SEC-registered investment advisor. HFDA is not affiliated with any sub- advisor.