Key takeaways
The U.S. Federal Reserve held interest rates steady in a range of 5.25% to 5.50% today, maintaining elevated rates to bring inflation down.
The Fed maintained projections for three rate cuts this year, while increasing core inflation and economic growth expectations.
Investors anticipate three to four 0.25% rate cuts in 2024 starting this summer based on interest rate market pricing, in general alignment with Fed projections.
The Federal Reserve (Fed) held its target federal funds interest rate steady in a range of 5.25% to 5.50% following its regularly scheduled two-day meeting, as expected by investors and economists. The Fed uses interest rate policy to carry out its maximum employment, price stability and moderate long-term interest rate mandates.
The Fed left its official statement mostly unchanged but updated the Summary of Economic Projections (SEP), an every-other meeting release that shares Fed committee members’ views on growth, inflation and the potential forward path for interest rates. The SEP indicated the median committee member expects slightly stickier core inflation and better economic growth this year. The tone of Chairman Jerome Powell’s press conference suggested ongoing data dependence as members assess the timing and magnitude of recalibrating interest rates. Considerable policy tightening from a near-zero federal funds rate in early 2022 to 5.25% to 5.5% today helped drive Core Personal Consumption Expenditures (Core PCE), the Fed’s preferred inflation gauge, from a peak above 5.5% in 2022 to 2.8% in January. Another key inflation metric, the Consumer Price Index (CPI), fell to 3.2% in February, though is also well off its high of 9.1% in June 2022.
The updated SEP and Powell’s comments drew the lion’s share of investor focus. In the SEP, the median committee member upgraded 2024 economic growth expectations from 1.4% in December to 2.1% today, while raising the 2025 projection from 1.8% to 2.0%. Members slightly lowered their projection for the unemployment rate by the end of this year to 4.0%, while increasing expectations for Core PCE from 2.4% to 2.6%. Overall, these revisions mirror investor expectations in recent months reflecting a somewhat stronger economy than many expected; consensus economist expectations for growth continue to move higher, as well. The Fed’s somewhat stronger growth outlook did not lead to projections for maintaining high rates for longer to cool economic activity and inflation for this year, but the Fed did signal that rates may need to stay higher in 2025 than their prior projections. During the press conference, Powell noted that, “We are prepared to maintain the current target range (of interest rates) for longer if appropriate.” Powell also addressed the Fed’s bond holdings, which the Fed is currently allowing to mature without replacement up to $95 billion per month. He noted, “The general sense of the committee is that it will be appropriate to slow the pace of runoff fairly soon.” We view this as an important comment that can help maintain constructive market liquidity currently in place, which has acted as a tailwind to stock prices.
Source: U.S. Bank Asset Management Group Research, Bloomberg; 2/20/2023-3/30/2024
Stock prices rose today as the Fed’s benign message and constructive economic outlook boosted investor sentiment. Shorter-term bond yields fell slightly. The S&P 500 finished the day up 0.89%, with growth-oriented sectors outperforming traditionally defensive sectors and broad-based gains evidenced across geographies and company size. Longer-term Treasury bond yields fell slightly (prices rose), with 10-year Treasury yields down 0.01% to 4.28% today, while two-year Treasury yields fell 0.07% to 4.62%.
Monetary policy, defined as central bank interest rate target decisions, remains restrictive around the globe after aggressive rate hikes. However, there were more rate cuts in the fourth quarter last year than rate hikes, as inflation across the globe continued trending lower and some emerging economies began easing monetary policy. Investors anticipate modest rate cuts from other major central banks in addition to the Fed, with three to four cuts expected in 2024 from the European Central Bank (ECB) and two to three cuts from the Bank of England (BoE).
U.S. Bank Asset Management Group Research, Factset; 8/31/2004-3/20/2024
2024 is marked by solid performance so far, with U.S. stocks, and larger stocks in particular, performing best, while emerging market stocks lagged relative to developed markets. The relatively narrow rally in 2023 that boosted growth-oriented stocks began to broaden late last year and continued broadening into 2024. Currently, 10 of 11 sectors in the S&P 500 index have posted gains year to date, with most index constituents participating in higher price trends. High-quality bonds have posted slightly negative returns year-to-date but offer reasonably compelling yields.
We remain close to long-term investment policy targets. Consumer and business activity remains robust, surprising many prognosticators, while recent economic data continues to be revised higher. Stimulative fiscal policy in the form of deficit spending provides an additional tailwind to current conditions despite increasing government debt, with legislation currently being discussed in Congress potentially maintaining fiscal stimulus this year if signed. We will keep you informed of our views as incremental data becomes available and as we update our assessment of market conditions.
As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.
This information represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is one of the most frequently used statistics for identifying periods of inflation or deflation.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).
U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
Persistently higher prices continue to weigh on consumers and policymakers alike.
The Federal Reserve appears to have reached a peak in its current cycle of interest rate hikes and is expected to begin cutting rates later this year.
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
