Key takeaways
As it has since late 2023, the Federal Reserve continued to hold the line on interest rates at its meeting of the Federal Open Market Committee which concluded on May 1, 2024.
It marked the sixth consecutive meeting with no change to interest rates after the Fed raised rates eleven times between 2022 and 2023.
Fed officials have indicated that rate cuts may be coming later this year, but there is no clear timeline for when rate cuts might begin.
As expected, the policy making Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) is holding firm on the federal funds target interest rate it controls, at an upper level of 5.50%. The latest decision to keep rates steady occurred at the FOMC's April 30 - May 1 meeting. It’s the sixth consecutive meeting with no change to the fed funds rates, dating back to September 2023.
With markets well prepared for the FOMC’s rate decision, the focus turned to post-meeting comments by Fed Chair Powell. Powell indicated that the next Fed move will be to cut rates, but added “we are prepared to maintain the current target range for the federal funds rate for as long as appropriate.”1 Nevertheless, Powell also indicated in response to reporters’ questions about the possibility of interest rate hikes this year that such a move is “unlikely.”2 This response provided some reassurance to investors who were increasingly concerned the Fed might yet again bump rates higher.
Investors were forced to back off expectations about the potential for rate cuts earlier in the year as the U.S. economy showed continued strength and inflation, while significantly lower than its mid-2022 peak, remained above desired levels. The Fed targets a long-term 2% inflation rate, but most recently, the Consumer Price Index (CPI) is 3.5% for the 12-month period ending in March. At the same time, the so-called “core” inflation rate (excluding the volatile food and energy sectors) rose 3.8% over the same one-year period.3 Another inflation measure, one watched closely by the Fed, is the core personal consumption expenditures (PCE) index. It stood 2.8% higher at the end of March compared to the previous year,4 further evidence that the Fed’s 2% target remains elusive.
In the meantime, there are other signs that the economy is expanding more steadily than many predicted, and perhaps beyond the Fed’s expectations. The U.S. economy added 303,000 jobs in March, and there remain approximately 1.32 available workers from every open job in the United States.3 As a result, says Eric Freedman, chief investment officer for U.S. Bank Wealth Management, “The environment indicates the Fed may keep rates up higher for longer, and that rate cuts won’t happen as quickly as we’d like.”
When the Fed first indicated in late 2023 that 2024 fed fund rate cuts were likely, markets initially priced in the first rate cut for the Fed’s meeting in March 2024. However, as various Fed officials commented in recent months that rate cuts weren’t imminent, markets backtracked. After markets generated a first quarter 2024 gain of more than 10.5%, the S&P 500 retreated more than 4% in April.5 At the same time, yields on the benchmark 10-year Treasury bond jumped from 4.20% at the end of March to 4.69% at April’s close, reflecting investors’ rising inflation fears.6
“The environment indicates the Fed may keep rates up higher for longer, and that rate cuts won’t happen as quickly as we’d like,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management.
A primary Fed focus since 2022 has been to temper the rapid rise in the cost of living. Headline inflation, as measured by the Consumer Price Index (CPI), peaked at 9.1% for the 12-month period ending in June 2022, but then began to steadily decline. However, after dropping to as low as 3% in June 2023, inflation remained above that level since.3
“Despite its progress since early 2022, current inflation is still above the Fed’s target rate,” says Freedman. “But we think the Fed will have to start cutting rates before inflation drops to its 2% target.” In fact, the FOMC’s projections indicate its expectations are that inflation will remain above 2% in 2024 and 2025, even as the Fed projects rate cuts over that span.
The other major development after the May 1 adjournment of the FOMC is that the Fed is slowing the level of balance sheet reduction. Dating back to the financial crisis of 2008, the Fed has routinely purchased bonds to bolster market liquidity. However, starting in March 2022, the Fed started reducing its bond holdings. On May 1, Fed Chair Powell reported the Fed would “slow the pace of decline in our securities holdings.” Rather than reducing Treasury bond holdings by $60 billion per month, Powell said the Fed would reduce holdings by just $25 billion per month beginning June 1.1 It represents a modest step toward loosening monetary policy. “In terms of the market’s response, such a move probably has less impact than a decision to start lowering the fed funds target rate,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. The Fed’s balance sheet of asset holdings grew to just under $9 trillion in early 2022. It’s now dropped to less than $7.5 trillion.7
Despite significant Fed monetary tightening, the U.S. economy remains resilient, and it appears that the Fed expects growth to continue. That includes an upgrade to anticipated 2024 economic growth as reflected in Gross Domestic Product (GDP). In December, Fed members projected 2024 GDP growth of 1.4%, but have now raised their projection to 2.1%. First quarter 2024 annualized GDP growth came in slightly lower than expectations, at 1.6%, which isn’t necessarily a warning sign for the economy, with growth still driven by solid consumer spending. “The consumer is still hanging in there,” says Freedman. “However, the environment may be getting a little tougher for lower-income consumers.” That may have been evident given challenging first quarter results for restaurant chains like McDonald’s and Starbucks, which tend to be susceptible to consumer spending pullbacks.8
Congress’ mandate for the Fed is to maintain price stability (manage inflation); promote maximum sustainable employment (low unemployment); and provide for moderate, long-term interest rates. Fed monetary policy influences the cost of many forms of consumer debt such as mortgages, credit cards and automobile loans. While Chair Powell receives much of the attention, the FOMC establishes Fed monetary policy, setting the fed funds target rate and the buying and selling of securities.
What do recent economic and market developments mean for investors? Today’s market offers opportunities across equities, fix income and real assets.
Be sure to consult with your financial professional and review portfolio positioning to determine if changes might be appropriate given your goals, time horizon and feelings toward risk given today’s evolving interest rate environment.
Monetary policy is controlled by a nation’s central bank, which in the United States, is the Federal Reserve (Fed). The Fed’s management of monetary policy can have a significant impact on the shape of the nation’s economy. Congress’ mandate for the Fed is to maintain price stability (manage inflation); promote maximum sustainable employment (low unemployment); and provide for moderate, long-term interest rates. Fed monetary policy influences the cost of many forms of consumer debt such as mortgages, credit cards and automobile loans.
The Fed is the nation’s central bank, and perhaps the most influential financial institution in the world. It is charged with helping the U.S. maintain stable prices (inflation), promote maximum sustainable employment and provide for moderate, long-term interest rates. These functions have a significant impact on the broader economy. The central governing board of the Federal Reserve reports to Congress, with the chair of the Federal Reserve appointed by the President. There are also 12 regional federal reserve banks that are set up like private corporations.
The Federal Reserve’s Federal Open Market Committee (FOMC) sets a target interest rate policy for the federal funds rate. This is the rate at which commercial banks borrow and lend excess reserves to other banks on an overnight basis. The fed funds rate is raised or lowered usually to help impact underlying economic conditions. For example, in 2022, as inflation surged, the FOMC began raising interest rates in an effort to make borrowing more expensive and slow economic activity. That strategy was designed to ease pricing pressures and reduce the inflation rate. In periods when the economy is slow or in a recession, the Fed tends to lower rates to try to stimulate economic activity and help the economy expand again.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
With the Federal Reserve maintaining higher interest rates for longer to get inflation under control, what opportunities does this create for bond investors?
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