Jill Toussaint

The Federal Reserve held interest rates steady today, and we think patience is the right approach. Inflation remains high, but the question isn't simply whether rates should go higher. It's whether higher rates would actually address the inflation that remains. The challenge is that parts of the economy, and of inflation itself, are moving at very different speeds. Growth remains remarkably resilient in aggregate, supported by a powerful investment cycle, but beneath the surface, parts of the economy that are more sensitive to borrowing costs are feeling considerably more restraint. We see a similar divergence in inflation. Many of the cyclical components that respond to higher interest rates appear relatively well controlled. Meanwhile, persistent pressures across energy, insurance, healthcare and education are unlikely to be meaningfully affected by another 25-basis-point rate increase. In some ways, the Fed is operating a house with one thermostat, but very different temperatures in every room. Turning it down further may make the rooms that are already cool even colder, without doing much to cool those that remain hot. That doesn't mean the Fed should become complacent. Inflation is still above its 2% objective and the Fed should retain the option to tighten further if the underlying inflation trend deteriorates. But hawkish rhetoric and patient policy can comfortably coexist, particularly when the bond market has already done some tightening of its own through higher Treasury yields. For investors, we think this environment argues for humility rather than making a heroic directional call on rates. Real yields remain attractive, and there's considerable income available across high-quality fixed income markets. We continue to favor a moderate duration posture, taking advantage of today's income opportunities while remaining patient as this unusually divergent economy evolves. The Fed doesn't need to ignore the heat. It just needs to be thoughtful about where it's coming from.

Heard from so many VC LPs this week. “The math doesn’t math”. An LP with a mature VC program is in this scenario: - At or over allocation to VC / Growth. Why? The NAV of their VC/Growth portfolio has grown 100%+ YTD because of lots of cap calls, few distributions and markups. Their public NAV is likely up +10% YTD (if indexed) and the PE/RE/Credit is flatish. The VC Growth numerator has wildly outpaced the denominator. - They don’t know how to plan for distributions because of public lockups and some big GPs still holding onto spacex. - 75%+ of their VC/Growth funds are raising right now. - Their IC is worried about bubbles, credit markets and being further overweight into any further market downturn. It’s the end of the year, so no one wants to make big decisions. At the same time, these LPs (having spent time in VC/Growth) know that all of the best stuff has NOT been done yet (so early on diffusion, the chatGPT moment in science/health/Physical AI) - This is going to lead to some tough decisions. GPs should plan accordingly. Helping LPs make the case to boards on why now/what next and understand cash flow planning is important at the moment.