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 adjusted its formal statement to acknowledge the improving balance of risks, and away from considering additional rate hikes noted in its December statement.

  • Investors anticipate five to six 0.25% rate cuts in 2024, starting in March or May based on interest rate market pricing, despite Fed Chairman Jerome Powell citing a March cut as unlikely.

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 widely 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 adjusted its statement language to emphasize the improving balance of risks. The previous statement from December had maintained a policy tightening bias, indicating an intent to keep interest rates in restrictive territory, which the Fed dropped from their new statement. The Fed did, however, temper investor optimism around a March rate cut. Considerable policy tightening from a near-zero federal funds rate in early 2022 to 5.25% to 5.5% today helped drive the core Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, from a peak above 5.5% in 2022 to 2.9% in December. Other inflation metrics, like the Consumer Price Index (CPI), remain in the 3.5%-4.0% range due to differing calculation methodologies; the CPI is well off its high of 9.1% in June 2022.

Without an update to the Fed’s Summary of Economic Projections, which committee members update every other scheduled open market committee meeting, investors focused on the formal meeting statement and Chairman Jerome Powell’s press conference comments. Removing a policy tightening bias from the prior version of the Fed’s statement paired with new language that necessitates gaining “greater confidence that inflation is moving sustainably toward 2%” created a balanced message. Investors initially perceived Powell’s press conference as dovish, suggesting rate cuts once additional data validates recent constructive data releases. On that topic, Powell noted, “We have seen six months of good inflation data … almost everyone on the committee is in favor of moving [rates] down this year, but the timing of that will be linked to our gaining confidence that inflation is on a sustainable path down to 2%.” However, later in the press conference, Powell said, “I don’t think it is likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to [initiate rate cuts].” Interest rate markets priced in a 45%-65% chance of a March rate cut earlier in the day but quickly fell to 30%-35% after Powell’s comment.

Market pricing of the expected path of the federal funds rate

Chart depicts market expectations for the federal funds rate from 2024 to 2029.

Sources: U.S. Bank Asset Management Group Research, Bloomberg; 12/13/2023-1/31/2024

Stock prices and bond yields fell today, with around half the losses coming before the Fed’s announcement. The S&P 500 finished the day down 1.6%, with year-to-date leaders such as the Communications and Technology sectors giving back the most. Foreign stocks lost less than most domestic indices on the day. Treasury bond yields fell (prices rose) earlier in the day after a small bank posted poor financial results and cut its dividend, marginally increasing the odds of rate cuts in the eyes of some investors. Ten-year Treasury yields fell 0.11% to 3.93% today, while two-year Treasury yields fell 0.11% to 4.23%.

Monetary policy, defined as central bank interest rate target decisions, remains restrictive around the globe after aggressive rate hikes. However, rate hikes subsided in the fourth quarter as inflation across the globe continued trending lower. Investors anticipate relatively aggressive rate cuts from other major central banks in addition to the Fed, with six to seven cuts expected in 2024 from the European Central Bank and four to five cuts from the Bank of England.

Global net central bank rate hikes (net hikes minus cuts), quarterly

Chart depicts net global interest rate hikes (less quarterly interest rate cuts) Q1 2006 - Q1 2024.

Source: U.S. Bank Asset Management Group Research, Factset; 8/31/2004-1/31/2024

U.S. large-company stocks have posted solid performance so far in 2024, particularly those oriented to faster earnings growth. More recent mid- and small-company stock price moves appear positive, as do developed foreign stocks. Stock market breadth remains robust across most global equity markets, with more constituents participating in higher price trends than normal, and investor sentiment remains strong. Bond markets posted slightly negative returns year-to-date, with Treasury yields rebounding slightly after the steep decline in late-2023.

We remain close to long-term investment policy targets. Consumer and business activity remains robust, surprising many prognosticators, while recent economic data reduces tail risk of a rapid deterioration as some have forecasted. Stimulative near-term fiscal policy in the form of deficit spending provides an additional tailwind to current conditions despite increasing government debt. 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.

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