In a hotly awaited announcement, the US Federal Reserve has this evening announced that, in a unanimous decision, it will not be making a change to the Fed funds rate, for which the target range remains at between 5.25% and 5.5% for this month. The messaging from the Fed statements has been closely scrutinised in order to give the market some idea of how the Fed is thinking and when it might consider reducing rates. Today’s report has been eagerly anticipated.
What have they said? Well, they’ve indicated some fine tuning, that although they believe it will still be some time before inflation targets will be met, they may well start cuts before that day comes. In this regard it indicates some early steps towards US interest rate reductions as the year unfolds. We shall have to wait and see how things materialise, particularly with the elephant in the room being trouble in the Red Sea and how that develops. In his statement, Chairman Powell said that economic activity has been expanding at a solid pace but that they’re looking for sustained evidence that inflation is moving towards their goal of 2% to which the Fed is ‘strongly committed’ but they are highly attentive to inflation risks.
What has the investment industry been saying following today’s Fed interest rate news?
Lindsay James, investment strategist at Quilter Investors:
“The Federal Reserve has kick started 2024 with a further hold on interest rates, the fourth consecutive meeting at which it has left rates unchanged, but with a further hint that rates are likely to be eased in the coming months.
“The question now is not whether the Fed will look to cut rates, but rather what will the timing and pace of its rate cuts look like? Macro-economic data has been strong, and the Fed’s preferred measure of inflation, core PCE, has been trending much closer to target. In fact, on the basis of annualization of the last three months of readings, it is already back below the 2% level. Job openings have continued to look robust, coming in well ahead of estimates, demonstrating the labour market remains an important driver of economic growth and serving to underline that the second of the Fed’s goals, namely ‘maximum employment’, is also looking like it’s been achieved.
“Though strong macro-economic data alone is not a reason for the Fed to delay rate cuts, only should it serve to trigger a further inflationary pulse, the market has seen the likelihood of a first rate cut in March slashed, and today’s meeting will almost certainly trigger further calibration around the extent and timing of future cuts. The Fed has reiterated its ‘data dependent’ decision making, but so long as inflation continues its downwards trajectory it is unlikely it will hold out on cuts for too much longer.
“With both the Federal Reserve and the European Central Bank opting to hold rates, the Bank of England is expected to follow suit at its MPC meeting tomorrow. The central banks will be reluctant to move too much too quickly for fear of disrupting the progress they have made in getting inflation under control, but it is only a matter of time before one of them begins the shift in policy.”
James McCann, deputy chief economist, abrdn, said:
“The Fed press statement confirmed that the central bank is no longer actively considering further hikes, confirming what the market has known for a number of months.
“However, the FOMC is not seemingly in a rush to cuts rates, warning that it needs greater confidence that inflation has sustainably returned to its target before it can ease policy. This will disappoint those in the market betting on a March cut.
“However, the door is not closed entirely on a quick policy pivot, with the statement signalling that an adjustment could come quickly should activity data start deteriorating.”
Paul Feinstein, CEO of Audent Global Asset Management said:
“Today the Fed left the interest rate at 5.5%. While this aligns with the forecasted 5.5%, we’re likely at the peak rate for 2024 as the Fed is still anticipated to make modest rate cuts at upcoming meetings later in the year.
I’m hopeful that the U.S. economy is nearing stability with inflation subsiding. We should begin to see people feel more confident in their financial decisions as soon as confidence grows, it’s important to make smart decisions for the long-term, given the economy’s volatility.
If we head into a recession like 2008, options have always played a part in helping to add portfolio returns because of their cash flow component, and they provide other beneficial attributes such as hedging a portfolio. As people begin to feel more confident and explore their investment endeavors, options strategies are a smart consideration for consistent, prolonged returns.
While the general view is that lower rates are better for stocks, given the impact on multiples and discount rates in discounted cash flow models, the more important question is why rates are where they are. Are they lowering because inflation has come down, and the economy is still chugging along, or are they lowering because the economy is tanking?
The Fed is getting ahead of it, and we must be cautious. In the face of potential economic challenges, it’s crucial to assess the underlying reasons behind rate adjustments and position investments accordingly. Keep a close eye on the economic indicators to discern whether the Fed’s actions are proactive in managing a potentially slowing economy or reactive to signs of a recession.“
