Just looking at the U.S. economy from a backdrop perspective, what have we seen?  We’ve seen a pretty resilient U.S. economy for sure. If you look at even GDP now for the fourth quarter, it’s 2.7 percent.  So it’s been a very strong, stable U.S. backdrop. On the consumer side, it’s pretty warm. The consumer, which is the linchpin of the U.S. economy, of course, is in a pretty favourable position and reasonably good shape.

Just laying out what we think Fed funds should be in different scenarios: We break it into three broad buckets – “restrictive,” which is four percent or higher; “neutral,” which is a range (there is no magical number around neutral so we’re using a range. But I think it’s safe to say the range of neutral is four to two and a half). And then below two and a half is “accommodative.” To have a more restrictive policy, you have to have a real kind of “GDP boom” type of scenario or a high inflation scenario. We don’t think that is necessarily the base case, but this is kind of how we frame it out. The markets have jumped all over the place though. So, I think what’s driving the volatility is the repricing of the tails.  And so, I think focusing on the tails matters a lot. I think there’s a lot of informational content coming from evaluating the tails. 

I think rates are too high still. Do I think inflation is sticky, do I think growth is reasonably strong? Yes, but at the same time, I think policy rates are set for a much higher inflationary environment. Unless inflation really turns around and starts to move higher, do I think we’ll see the same level of this inflation? No, I don’t. I think it will kind of stall out here, but I don’t think that keeps the Fed from getting to neutral. Being less restrictive is the path forward here.

I really think we’re in store for a very volatile year. The first quarter and first half, expect volatility to continue. I think fixed income, at least from a yield perspective, is going to reflect that volatility. But I continue to be quite constructive around the carry component and the option component if things go awry fundamentally. So, I can’t stress enough that yield matters here, starting point matters, and I think having fixed income in a broad balanced type of portfolio continues to make a lot of sense. So, we’re quite constructive. We’re staying vigilant, but we think it’s about yield and carry in 2025.