Over my last 40 years in the investment business, I have built a list of rules that support success. We call it the four rules for investment success, but it is closer to 24. The most recent rule added says: “The potential for mistakes is everywhere, the easiest one to avoid is prophesy.” 

The funny thing about this rule is that many readers of this monthly article look for our interpretation of things to come based on our perspective of the data. I would offer a compromise by saying our outlooks are supported more by historical correlations and mean reversion than by prophesy. 

We continue to believe the Federal Reserve’s 2% inflation target is still a long way off and that 3% remains more probable for the foreseeable future. There is a good chance the inflation data for April that will be released May12 will show annualized inflation at 3.5%, which is up from its current level of 3.3%. The visible culprit will be the increase in energy prices while the invisible part will be the increase in housing costs (owners’ equivalent rent). Some of you are saying that it has not gone up recently and you are correct. The reason we are citing this as a potential inflation driver is that this rent survey only happens twice a year and the last time the sampling was supposed to occur was during the government shut down last year. There was no data collected at the time. 

This brings us to the Federal Reserve. The Fed Fund finished last year at 3.5% and remains there today. As recently as last December, markets were looking for two rate cuts in 2026 bringing the rate down to 3% by year end. Our outlook at the time citied the two-year treasury as the guidepost for the Fed Fund rate outlook. At the time, that relationship suggested there would be no change in the Fed Fund rate this year. That looks like where the market is currently trending. Interestingly, it could be argued that the two-year treasury is starting to signal the prospect for a rate increase this year.  

One final note on the Fed. The incoming chair, Kevin Warsh, is expected to support reducing the Fed Fund rate. As it stands, the prospect of doing that has the potential to lead to more inflation. Since that is not consistent with the Fed’s mandate, there is a bit of sleight of hand that can be used to both deliver a rate cut and then neutralize it by selling assets from the Fed’s balance sheet. If a rate cut does come, we expect it to be accompanied by a reduction in the balance sheet. In other words, it will be neutralized. 

Thank you for your business and confidence in Bell!

Greg Sweeney is the Chief Investment and Economic Strategist at Bell Institutional Investment Management. He guides the investment strategy, and this outlook is his perspective on the latest market trends and what they could mean for investors. Any views, strategies or products discussed in this article may not be appropriate or suitable for all individuals and are subject to risks.