Fed's Dilemma: Boost Job Growth or Fight Inflation

MIKE TOWNSEND: Last week's meeting of the Federal Reserve may just have been the weirdest monetary policy meeting the central bank has ever held.

Twenty-four hours before it began, it wasn't even clear who was actually going to be at the meeting. The president's attempt to fire Fed Governor Lisa Cook was awaiting a court decision about whether she could continue to serve in her role while her legal challenge against the president unfolded. The night before the meeting started, an appeals court ruled that she could stay.

At virtually the same time, the Senate was voting on whether to confirm Stephen Miran, the chair of the White House Council of Economic Advisors, to fill an empty seat on the seven-member Fed Board of Governors. He was confirmed by a single vote, 48 to 47, and took the oath of office just minutes before the Fed meeting began on September 16. 

Cook and Miran both participated in the two-day meeting at the Fed last week—which, to no one's surprise, culminated in the announcement that the Fed was lowering its baseline interest rate by 25 basis points, the first cut in 2025. The vote was 11 to 1, with Miran dissenting, favoring instead a 50-basis-point cut. 

In his press conference following the meeting, Fed Chair Jerome Powell talked about the dilemma the Fed is in as it tries to manage two competing problems—a softening job market and inflation that is inching upwards. He said there is "no risk-free path" forward when it comes to interest rates.

But the intensity around this meeting went deeper than just a tricky monetary policy decision. The real issue that has long-time Fed watchers, financial analysts, institutional investors, and just about everyone who watches the markets concerned is the Fed's independence itself. No president has ever tried to fire a Fed governor until now. No Fed governor has ever simultaneously held a White House position until now. Every Fed move for the remainder of the year will be under unprecedented scrutiny. 

For fixed-income investors already anxious about the economy, inflation, runaway government spending, the national debt, and more, turmoil at the Fed is another worry. How should investors navigate all of this uncertainty?

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

After last week's Fed meeting, there is a lot to sort through. And that's why I'm so glad that Kathy Jones agreed to join me on the podcast this week. Kathy is Schwab's chief fixed income strategist and someone I trust more than just about anyone I know to have a good read on the Fed and a thoughtful take on what matters to the bond market. That conversation is coming up in just a few minutes.

Before we jump into that discussion, I want to share a couple of other things I am watching right now in Washington. First up, we're now less than a week from a government shutdown, and Congress seems to be a long way from resolving the standoff. In fact, Congress is not even in Washington discussing how to resolve the standoff. There are a lot of moving parts here, so here's a quick update on the state of play. 

Regular listeners of this show know the drill by now—Congress is supposed to pass the 12 appropriations bills that fund every federal agency and program by the start of the government's fiscal year on October 1. This year, Congress hasn't passed any of the bills yet, with less than a week to go until a potential shutdown. Both the House and the Senate have passed three of the 12 bills—the ones focusing on Agriculture, Military Construction and Veterans Affairs, and the Legislative Branch. And the two chambers have agreed to meet in a conference to hash out the differences on those bills.

That's actually a positive sign—it's the way legislation is supposed to work: The House passes a bill, the Senate makes some changes and passes the bill, and then the two chambers meet to combine the bills into one final version that both chambers can agree on. Those discussions are ongoing, and both sides have said that they have been productive and cordial. So it's at least a sign that the regular appropriations process can still function. 

But even if a compromise emerges from that effort, it only covers three of the least controversial of the 12 bills. So attention is focused on a short-term fix to avoid a shutdown. Last week, the House approved a temporary extension of funding known as a "continuing resolution," which would keep the government open and operating until November 21. The Republican plan also includes nearly $90 million in additional security funding for all three branches of government in the wake of the Charlie Kirk shooting. That plan passed the House by a single vote, 214-213. 

But when it went to the Senate, it failed to get anywhere near the necessary supermajority of votes. Also failing was a Democrat-authored alternative proposal that would have included several health care items and also language to prevent President Trump from clawing back funds that Congress approves. 

Both the House and Senate are in recess this week for the Rosh Hashanah holiday. The Senate is scheduled to return on September 29, when they will have about 36 hours left before a shutdown. The House of Representatives is not scheduled to return to Washington until after the October 1 deadline. Democrats have appealed directly to President Trump for a bipartisan meeting to try to hash out a compromise. The president first agreed to such a meeting, then said the meeting was off, and things may change again as we get closer to the deadline. 

But as of right now the chances of a shutdown next week seem very high. If that happens, the question then becomes: How do the two parties get out of a shutdown? Senate Democrats are particularly concerned about the fact that enhanced subsidies that help people buy health insurance through the Affordable Care Act are set to expire at the end of the year. Even some Republicans don't want to see those expire. And, Democrats are arguing, since the open enrollment window to make health care insurance purchases or changes for next year starts on November 1, dealing with the issue in late November or December is just too late. They want an extension of the enhanced subsidies to be attached to the continuing resolution. Republicans want to deal with that issue separately—but that would likely mean not addressing it until after the enrollment window opens.

Government shutdowns are inherently unpredictable. The administration gets to designate who is an "essential" employee and must show up for work without pay until decisions are finalized, thereby deciding which government services will continue to be provided and which will not. TSA agents at the airport, for example, are certain to be designated as essential so as not to disrupt air travel. But National Parks are typically closed during shutdowns. It's just not certain yet how this administration will handle a shutdown if it happens. And ending a shutdown typically is decided by which party blinks first—and that's tied to which party is getting most of the blame for the shutdown. If one happens next week—and it is looking increasingly likely—there is a lot of uncertainty about how it will play out and how long it will last. 

As I have said before, government shutdowns historically have not been big market movers at all. But given other uncertainties in the broader economy, it's possible a prolonged shutdown could have a negative effect on the markets this time around. 

The other issue I'm watching right now is something that I think it going to be really important for investors to follow in the months ahead. Last week, the president used a social media post to float the idea of ending the requirement that companies report their earnings each quarter and instead move to semiannual reporting. He argued that it would save money and would help companies focus on the longer-term growth of their company while being less focused on meeting short-term goals. A few days later, the Trump-appointed SEC Chairman Paul Atkins said in an interview that he supports the plan, that he's talked to the president about it, and that he expects the SEC to propose a rule making the change in the coming months. 

Notably, he also made it clear that he expects any rule would leave it up to companies to decide whether to report quarterly or semi-annually. "For the sake of shareholders and public companies, the market can decide what the proper cadence is," Atkins told CNBC. I think this is going to be a fascinating issue to watch. The SEC has required quarterly reporting since 1970. President Trump brought this issue up during his first term, and in 2018 the SEC requested public comment on the idea, but it never went anywhere after that. Semi-annual reporting is used in other countries like France, the United Kingdom, and Australia, though quarterly reporting remains the standard in most major economies. 

Any proposed change this time around will require the usual rule-making process, including time for public comment on the proposal, so it could take several months, at a minimum, for it to get changed. Companies have long complained about the burden of quarterly reporting requirements, and some investors have complained that the cycle forces company executives to focus on hitting artificial short-term targets rather than building for the longer term. 

Opponents of this idea argue that it will just mean less transparency for investors into what's going on in a company and that less transparency will lead to increased market volatility. SEC Chairman Atkins said last week that "it's a good time to look at whole panoply of ways that people get information and how it's disseminated." He has already signaled that he plans to push forward with reducing or eliminating corporate disclosures on things like executive compensation, climate risk, and conflict minerals. But quarterly reporting requirements fall into a different bucket. Even if the SEC changes the rules, it appears likely to make it optional—and it's hard to imagine investors and shareholders in most public companies being comfortable with less frequent information.

It's clear this is an issue on a fast track—it moved from a presidential social media post to a plan for rulemaking in less than a week. I'll be keeping a close eye on this one going forward.

On my deeper dive today, I want to focus on last week's remarkable Fed meeting and its implications for the economy and fixed income investors. To do that, there's no one better than my colleague Kathy Jones, chief fixed income strategist here at Schwab. Kathy is also co-host of our sister podcast On Investing, a weekly show where she and Liz Ann Sonders, Schwab's chief investment strategist, discuss what's been going on in the markets and the economy. Kathy, welcome back to WashingtonWise. Thanks so much for making the time to join me today. 

KATHY JONES: Great to be with you, Mike. Thanks for having me. 

MIKE: Kathy let's start with last week's Fed meeting, which was full of drama for a variety of reasons, and we'll get into some of them in a minute. But the actual monetary policy decision to cut the fed funds rate by 25 basis points, not that surprising. In his press conference, Chair Jerome Powell called the move a risk-management cut. How did you interpret that?

KATHY: My take is that Fed Chair Powell was referring to trying to manage the risk of a rise in unemployment versus the risk of rising inflation. The Fed has been focused over the past year primarily on setting policy to pull down inflation. But with the recent big down revisions to the jobs data, the Fed's starting to turn its focus to the labor market. As you know, Mike, the Fed has a dual mandate to set policy for 2% inflation over the long run and for full employment. And right now, those two mandates are in tension—inflation is stuck near 3%, looks like it's edging a little bit higher, while the labor market is softening. So the Fed is trying to adjust policy to both realities. By cutting rates, even though inflation is above target, it's hoping to forestall a further deterioration in the job market. Now, I will note that Fed Chair Powell also said there is no risk-free path for monetary policy. The Fed is quite aware that they're trying to fine-tune the policy to balance these opposing forces, but if they move too far in one direction, they run the risk of missing in the other direction by a wide margin. So it's not an easy position to find oneself in. 

MIKE: You know, Kathy, it was perhaps a minor surprise that the vote was 11-1 in favor of the 25-basis-point cut. Only one dissenting vote, and that was from the newest governor, Stephen Miran, who was literally sworn into office right before the meeting started. We'll come back to him in just a minute. But going into the meeting, there was some thought that there might be additional dissents, though Chair Powell seemed to do a pretty good job of holding most everyone together. However, there is a wide range of views within the Fed on where things should go from here and how quickly. The projections in the so-called dot plot showed that at least one FOMC member thinks rates could go higher, and another thinks we should have massive cuts right away. Even Powell said it's not incredibly obvious what to do. So is this just part of a healthy debate at the Fed? It feels like the Fed is really struggling with the situation. Of course, they're no strangers to rough patches, but what do you think is causing them so much angst this time? 

KATHY: I think you're right, Mike, that it is part of the healthy debate that takes place at the Fed. Despite the near consensus voting record over the last 10 years or so, there are really diverse views at the Fed. Each regional bank president reflects the views of their region, where you can imagine the conditions in the Kansas City region, where the agricultural sector is currently under a lot of stress, are different than those in Boston, where the strength in the tech sector and in finance is keeping the region's growth rate healthy. These two regional presidents may end up voting for the same policy, but they have different ways of getting to their conclusions. In general, monetary policy in major countries is more effective in influencing demand than supply, and I think that's one of the struggles they're having right now. And it's one reason that Powell said that there's no clear path from here, because right now we have an economy that continues to grow, but in a lopsided way, with upper end consumers as the driving force. The unemployment rate is still low, but job growth is really weak, and meanwhile, inflation is pushing higher, largely due to tariffs. 

So on both sides of the equation or the mandate, the problem the Fed is facing is largely supply driven. Part of the slowdown in the labor market has to do with immigration restrictions that are reducing the supply of labor. The story is similar with inflation. Some goods are simply not coming into the U.S. because companies can't or won't pay the import tax. And if they do pay the tariff, they try to pass it on to consumers, and that adds to price pressures. So either way, supplies are being constrained, and the Fed has no influence over supply issues. So it's making the job really tough right now. 

MIKE: Yeah, you know, we talk all the time about the Fed's dual mandate, and they certainly seem to be worried, at least to the moment, more about the labor market than about inflation. And I think that's because it wants to get ahead of this problem with jobs because that can be so hard to turn around once it really starts going in the wrong direction. But as we've been discussing, there are these big divisions even among Fed officials on whether that's the appropriate focus. What if they get this wrong? So a two-part question for you. What are the implications for the economy of prioritizing jobs over inflation? And if they realize they're on the wrong path, how quickly can they reverse course? 

KATHY: I think the implication of focusing on jobs over inflation, or the risk around it, is it could end up with the economy running too hot and driving up wages and demand and resulting in even more inflation. And that would be a problem, as it would imply that the Fed would have to then reverse course and hike rates rather aggressively to counteract the inflation it just created. And would also likely raise inflation expectations, which the Fed tries to manage because the expectation of inflation can actually be self-fulfilling. So for example, if you think prices are going to go up next month, you might run out and buy whatever that thing is you're looking for today. If everyone does that, then the price will go up because demand is strong. We used to refer to it as too much money chasing too few goods. Also, after being late to the game in addressing the pandemic inflation, I would think the Fed would be very cautious this time around. 

Now, on the second part of the question, yeah, the Fed can reverse course very quickly. It has in the past, as we saw coming out of the pandemic, when prices rose quickly because demand was outstripping supply. But it's disruptive, and it can hurt companies and consumers in the short run that had planned for lower costs, and then they find that costs for financing have driven up for business inventories and operations, and the cost to consumers are up, like credit cards, car loans, and mortgages. 

MIKE: Kathy, you and I have both been watching carefully all the turmoil and uncertainty at the Fed over the last few weeks. As I mentioned, it was less than 24 hours before the meeting when Stephen Miran was confirmed and sworn in, and Fed Governor Lisa Cook, who President Trump is trying to fire, got a court order allowing her to remain in her role as a governor that same evening. In addition, of course, the president has been pressuring the Fed, really, all year, to cut rates. I would have loved to be a fly on the wall at last week's meeting just to see the interpersonal dynamics that were going on in that room. 

But as a result of all this chaos, there has been a lot of talk about Fed independence. I do think there is real evidence the president is aggressively trying to chip away at that. We have the fact that Stephen Miran is still technically a White House employee. He's chair of the White House Council of Economic Advisors. He's taking an unpaid leave of absence from that position, rather than resigning. And there's never been a White House employee who simultaneously served on the Fed Board. Then we have the firing of Lisa Cook. No president has ever tried to fire a Fed governor before. Her case will almost certainly end up before the Supreme Court. 

And one of the reasons that the stakes are so high is that, if she loses and the president can fire her, he can nominate someone else, and then he will have named a majority of the board members, four out of seven. To take this one step further, in February of 2026, the board needs to confirm the presidents of the 12 regional banks, four of whom are voting members on the FOMC on a rotating basis. That confirmation, which happens once every five years, typically is quite routine, but there is a concern that a majority of the board could vote to fire some or all of the bank presidents, install individuals who are more loyal to President Trump, and then the president would have a voting majority on the FOMC to set rates. Now, granted, that's a lot of steps that need to happen. We are quite a long way from that happening. But when you play out potential concerns about Fed independence, that's a road that you can go down. So my question for you, how concerned are you about the Fed's independence, and what would be the potential fallout from something like the scenario I just laid out, both domestically and abroad? 

KATHY: Well, it is something that's become a much bigger concern recently. The administration has been quite outspoken and aggressive about wanting the Fed to pursue a different policy and cut interest rates sharply. And as you say, there is, at least in theory, a path for the administration to appoint people with views that are not independent. The public, or at least people like me who follow monetary policy closely, want to see Fed officials are acting more like guardians or watchdogs of the financial system and of the economy. The hope is that they're maybe more technocrats than politicians. There are times when they have to make unpopular decisions for the good of the overall economy, and you want them to be independent. I worry that even the appearance of heavy influence by the administration to push interest rates lower can weaken confidence in the Fed. In practice, the worst-case scenario would be something like we've seen over the past few years in Turkey, where the president of the country took control of the central bank, installed a relative to do his bidding and push interest rates lower at a time when inflation was high, and it really caused chaos in the economy. Inflation soared, and the Turkish lira fell sharply as a result, and it's been quite a struggle. 

Having said all that, look, the Fed has a long history of pushing back against politicians. If you read various books written by historians and former Fed officials, there are stories about administrations, both Democratic and Republican administrations, trying to push the central bank to lower interest rates. It's nothing new. And the institution of the Fed has remained stable throughout those years. I've known many people who worked at the Fed over the decades I've been doing this job, and although there are differing views on politics, no one I've ever met has tried to bring that into the job. Chair Powell says in every press conference following its meeting, after the Federal Open Market Committee Meeting, that everything they do is in the service of the people, and I believe he means that. So I'm watching but remain optimistic that the institution itself will remain stable. 

But look, the fact we're even having this discussion isn't a good thing. It's something we're watching, but in my view, there's no reason to jump to conclusions as to how this will all play out. 

MIKE: Yeah, I really appreciate you saying that, Kathy. I think it's a really important thing to remember. And even the scenario that I laid out, as I said, has a lot of steps and a lot of things that would have to happen in order to make that happen. So we'll continue to watch it. 

But something else I've been thinking about a lot in the context of the Fed independence discussion is that the administration and especially the public can get confused over what rates the Fed can actually control when it makes a monetary policy decision. A cut like happened last week is a reduction in the fed funds rate. That's the rate banks charge each other for overnight loans. And that's really the only rate that the Fed can actually set. It can be a signal for other rates, but it does not specifically affect, say, mortgage rates or the rate I pay on my car loan, and it doesn't affect the rate that bond investors are demanding for their investment. I think that's where the disconnect happens between the Fed's benchmark rate, and for example, what investors are demanding for a 10-year Treasury, which is set by the market. To that end, now that the Fed has resumed its rate-cutting cycle, what is your outlook for other rates? 

KATHY: Since late last year, I've been of the opinion that the Treasury yield curve would steepen. And what do I mean by that? I mean that the difference between short- and long-term rates would widen or increase. So as you said, the Fed directly influences short-term interest rates. It sets the fed funds rate, that very short-term rate that banks charge each other for loans.

It's usually overnight. So any loan tied to the short-term market will tend to track the Fed's policy moves pretty closely. But as you go further out in maturity, other factors come into play, including inflation and inflation expectations, prospects for economic growth, and supply and demand factors. So typically when the economy is in growth mode, intermediate to long-term rates will be higher than short-term rates

Investors demand more yield to compensate them for taking the risk that inflation is going to be higher than expected or that there might be some unexpected increase in the issuance of Treasuries, which is supply, or a drop in demand for Treasuries. And we call this extra yield a risk premium or the term premium. In an environment like this, where inflation is higher than the Fed's target and edging higher, and fiscal deficits are high and rising, that risk premium is likely to rise. So in our view, there's room for yields to fall for all maturities of bonds as the Fed lowers rates, but much less room for long-term bond yields due to these worries about the deficit, about inflation. It's even possible that long-term rates rise as the Fed cuts rates. That happened in 2024. Since long-term rates affect mortgages and other types of consumer loans, it could be very confusing for the public to see the Fed cutting rates, but seeing, say, mortgage rates or credit card loan rates going higher.

MIKE: I want to pick up on your comments about one of those factors, and that's the impact of fiscal deficits because I know that's something that fixed income investors are thinking about. The One Big Beautiful Bill that was signed into law over the summer increased the debt ceiling by $5 trillion, and that wasn't really that controversial. Even Republicans who had never supported a debt ceiling increase in the past chose to vote for it this time. 

While elected officials are not acting particularly concerned about the ballooning deficit, the bond market seems to care quite a bit about it, and that seems to be playing, as you said, a role in the steepening yield curve. So can you give us more clarity on where the yield curve stands right now, and what else may be driving it, and what investors should be watching for as they take a look at this? 

KATHY: The Treasury yield curve has been steepening, with short-term rates falling, long-term rates kind of holding steady or edging a little bit higher here. I look at the difference between two-year Treasuries and 10-year Treasury yields as one indicator. And that's widened out to about 55 basis points, and it was much, much lower, closer to 20 basis points just earlier in the year. 

I think the rise in long-term yields is likely in part due to the concerns about fiscal policy. It's not just happening in the U.S. either. It's a global trend. In developed markets, deficits have risen relative to the size of economies, in some cases to record levels, which means there will be a lot more bonds issued by these countries that have to be absorbed by the market. Even in Germany, which traditionally has limited its debt, there's increased issuance. And that's pushing yields higher everywhere. It's especially concerning if inflation remains high because inflation erodes the value of bonds. There are even some concerns that countries will try to inflate their way out of the debt or monetize the debt. So naturally, investors are demanding more yield to compensate for those risks.

I want to add, though, that I'm not in the doom and gloom camp about this. I always like to point out we are a very wealthy country with a growing economy and have the capacity to service the debt. We, meaning Congress, just need to demonstrate the will to do what's necessary to address our rising debt levels. In an ideal world, we'd focus on outgrowing the debt, that is having economic growth exceed the growth rate in the debt over time, and that would bring down debt-to-GDP. But it will probably entail making some unpopular decisions such as raising taxes and cutting spending in some areas, and those are difficult things for politicians to do, as you well know, Mike. 

MIKE: Yeah, no question, Kathy, there's a focus on Capitol Hill on cutting spending by some. But we also saw the lowering of taxes, not the raising of taxes. As we know, that's always a very politically tricky thing to deal with. 

You know, a question that you and I hear constantly is will the U.S. be able to sell all of the treasuries it needs to issue? So far, that hasn't been a concern. Foreign governments and private investors hold about 30% of our debt. But it feels like the combative nature of tariffs, hostility towards immigration, the drastic reduction in foreign aid, these are all signs that our attitude toward and role in the world may be changing. So are you seeing signs that foreign investors are growing concerned? For instance, have you seen anything in Treasury auctions that concerns you? Is there a concern that it will take ever-increasing rates to entice new buyers, given all the other factors? 

KATHY: So far, we haven't seen a lot of pushback. The auctions are going along without much disruption. Yields have tended to come in close to where the market is trading, and that's pretty much by design because we know the amount that's coming due, and the market adjusts to that. So some of that has to do with the fact that the Treasury has been issuing a lot of short-term debt, which is generally pretty easy to find buyers for. It's much easier to sell a six-month or one-year T-bill than it is to sell a 10- or a 30-year bond. In the recent Treasury International Capital Report, we call the TIC Report, it showed that foreign inflows of capital are continuing. They have slowed down a bit from last year, but they're still positive on a year-over-year basis. And that's indicating foreigners are still coming to the U.S. markets. 

MIKE: I want to follow up on two things you said, one that the yields on foreign bonds may go up, and two, that it's the short-term bonds that are holding U.S. yields close to where the market is trading. So if foreign bonds may be offering better yields, and the U.S. can't cover the debt with just short-term debt, and you add increasing inflation to the mix, wouldn't it stand to reason that long-term rates will have to go up? 

KATHY: Well, that is one of the risks, Mike. Yields are rising globally for a number of reasons, but deficits and inflation pressures are the primary reasons. We're also seeing an unanchoring of yields from Japan. So for decades, the Bank of Japan has held down their long-term interest rates in an effort to manage their high level of debt, and they're starting to let go of that and ease out of that, and that's allowed those yields to come higher, and that has pushed up or contributed to the rise elsewhere. So it is the case that we're seeing a combination of rising deficits and inflation pushing up yields globally. And it certainly is a risk for the U.S. It will be very difficult for our yields to fall relative to those around the world, unless we were in recession or something, and we see very aggressive rate cuts because we were falling into recession and inflation was falling. So it is a risk that they might have to go up. I think that it's a risk that's already reflected to a large degree in the market, but it is something that's out there that we have to keep an eye on. 

MIKE: Another thing I know you follow closely is the dollar. The dollar is down more than 10% year-to-date. What's driving that? What are the biggest impacts of a weaker dollar if that continues, and should we be concerned? 

KATHY: Well, dollar is down, as you said, about 10% from its recent high. It's largely down, I think, because the prospect of the Fed lowering interest rates, and a slower economy, lower interest rates. U.S. interest rates are still generally higher than those in most other major countries, but the difference in yield has narrowed. So all else being equal, a lower interest rate makes the currency less attractive to hold. There also may be a component of concern about economic growth and/or the impact of tariffs on trade. And finally, some investors have the view that the administration welcomes a weaker dollar in order to boost exports. So it's perceived by some that there wouldn't be any pushback from the government if the dollar were to fall further. 

One of the consequences of a weaker dollar is it does tend to push prices higher. The U.S. is a huge net importer of goods, and as the dollar drops, it takes more dollars to buy those goods. Putting it differently, the price of imports to U.S. consumers goes up. And that's one concern. The other is that we need to import capital to offset our trade deficit. So there is a risk that a rapid drop in the dollar could discourage inflows of capital as foreign investors kind of step back. 

MIKE: Kathy, we've covered a lot of topics in this conversation. I really, really enjoyed it. I always like to end with having you talk about what all this means to the fixed income investor. Given everything that's going on, where do you see opportunities, and maybe conversely, areas of concern for bond investors right now? 

KATHY: Overall, despite all the concerns in the markets, we think it's still a good environment for bond investors. Yields are relatively attractive, and more likely some parts of the yield curve to fall than to appreciate. But we continue to focus on managing the risks by keeping the average duration in portfolios in the intermediate-term part of the market, meaning five to 10 years, and staying in higher-credit-quality bonds. 

So an intermediate-term duration avoids two types of risks, reinvestment risk and interest rate risk. So reinvestment risk is when you hold a lot of short-term investments, and when they mature, you end up reinvesting the proceeds in lower-yielding bonds. So your income tends to go down. You get less and less yield along the way. On the other end, you have interest rate risk, and that's when interest rates move up, causing the value of your bond to fall. Should you need to sell them, you could take a loss. The longer the duration or maturity of your bonds, the greater the potential is for price declines. So staying in the middle or trying to spread out maturities over time so they average in the middle makes sense to us given all of the uncertainty out there.

Now, in terms of credit quality, we don't see a lot of value in the riskier parts of the bond market right now, such as high-yield or junk bonds. You're just not getting a lot of extra yield to compensate for the potential for volatility or a default. So we would rather look to higher-credit- quality part of the markets, like Treasuries, other government-backed securities, investment-grade corporate bonds, and investment-grade municipal bonds.

MIKE: That's great advice, Kathy, and this is a great discussion of a lot of different factors that are coming to play in the bond market and certainly for the Fed. Thanks so much for taking the time to talk to me today. I really appreciate it. 

KATHY: Always great to be here. Thanks Mike. 

MIKE: That's Kathy Jones, chief fixed income strategist here at Schwab. You can follow her on X @Kathy Jones, and be sure to check out her podcast, On Investing. Definitely worth your time. 

That's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks, when we will take a look at how equity traders are navigating this record-setting market while also watching some worrying signs in the economy. 

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For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.   

I’m Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.