Key takeaways

  • After raising interest rates eleven times since March 2022, the Federal Reserve elected not to hike rates again at its September 2023 meeting of the Federal Open Market Committee.

  • Since July 2023 the fed funds rate has been set at a range of between 5.25% and 5.50%.

  • While inflation has declined considerably over the past year, it remains above the Fed’s 2% goal.

As markets expected, the Federal Reserve (Fed) declined to raise interest rates at its latest regularly scheduled meeting. This pause occurred after raising rates eleven times since early 2022. Following the September 2023 meeting of Fed’s policy-making Federal Open Market Committee (FOMC), two major questions stand out:

  1. Are additional Fed rate hikes possible in 2023?
  2. At what point will the Fed reverse course and begin cutting interest rates?

The fed funds rate today is set at a range of 5.25% to 5.50%, its highest level since early 2001.1 Fed chair Jerome Powell indicated that the possibility remains that another rate hike could occur in 2023. The FOMC will render interest rate decisions again in early November and once more mid-December. Powell also stated that it’s not clear at what point the Fed will begin cutting rates.2

The Fed’s current rate policy is a drastic shift from its “easy money” stance that was in effect dating back to the financial crisis of 2008. Over much of that period, including 2020 and 2021, the fed funds rate was set to a range of 0.00% to 0.25%. In March 2022, as inflation surged, the Fed shifted course and rapidly raised rates throughout the remainder of 2022 and into 2023.

The Fed also retained its commitment to reversing a previous policy of quantitative easing (QE) that involved purchases of Treasury and mortgage-backed securities. QE was aimed at providing more liquidity to capital markets. The Fed is trimming its balance sheet of those assets, from its peak near $9 trillion.3 This so-called “quantitative tightening” approach, combined with higher interest rates, is designed to temper inflation by slowing economic growth through higher borrowing costs. Since early 2022, the Fed’s balance sheet declined to roughly $8.1 trillion, down 9.6% from its peak in April 2022,3 but still sizable by historical standards.


A reaction to inflation

The main challenge the Fed seeks to correct is the sudden 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, then dropped steadily over the course of a year. CPI stood at 3.7% for the 12-month period ending in August 2023.4 Inflation still exceeds the Fed’s target long-term rate. “The Fed emphasized that 2% is its annual inflation target,” says Eric Freedman, chief investment officer, U.S. Bank Wealth Management. “Despite its progress over the last two years, current inflation is still a far cry from the Fed’s target rate.” Following the Fed’s September 2023 meeting, Powell re-emphasized the Fed’s inflation-fighting focus. “Without price stability, the economy does not work for anyone,” said Powell.5 He pointed out that core inflation, an important measure of living costs that excludes the volatile food and energy sectors, remains well above the headline CPI number of 3%. Core CPI is 4.3% for the 12-month period ending August 2023.4

“It appears the Fed is close to done raising interest rates, but will likely keep rates elevated well into 2024,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

“It appears the Fed is close to done raising interest rates, but will likely keep rates elevated well into 2024,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. Notably, at its September meeting, FOMC participants indicated that only modest rate cuts might occur in 2024.6 This may reflect revised expectations for economic growth, according to Freedman. “The Fed acknowledged that the economy is stronger than they expected it to be, and the reason for that is the stability of the consumer.” Through the first half of the year, the economy was on pace for growth (as measured by Gross Domestic Product) in the 2% range.7 Freedman also notes that “with Americans earning consistently higher wages, the Fed also upgraded its growth projections for 2024.” That’s an important change, notes Freedman, because it tempers expectations about the degree to which the Fed may cut rates next year. Investors are looking for signs that the Fed can begin cutting rates, which might help spur more positive stock and bond market sentiment.


Inflation remains the Fed’s dominant focus

How will the Fed measure when rates have gone far enough or when it can begin to change its policy and start cutting interest rates? One key measure is the state of the job market. “To this point, we haven’t seen labor market data reflect the Fed’s efforts,” says Haworth. He notes that unemployment remains below 4% and the number of available jobs, while in decline, still greatly outpaces the number of unemployed workers. Recent reports show that compensation costs for workers rose 4.3% for the 12 months ending in August 2023, little changed from recent trends.8

“The Fed would like to see wage growth decrease further,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. “The Fed’s concern centers on the fact that higher wages feed into higher demand for goods and services, which contributes to higher prices.”


Role of the Fed

While the Federal Reserve acts as the U.S. central bank, maintaining an effective payment system and overseeing bank operations, investors primarily focus on the Fed’s monetary policies. Those policies are designed to maintain price stability (manage inflation); promote maximum sustainable employment (low unemployment); and provide for moderate, long-term interest rates.

Fed monetary policy influences short-term interest rates, specifically, the target fed funds rate, which is the interest rate applied to overnight loans from one financial institution to another. But it also influences many forms of consumer debt such as mortgages, credit cards and automobile loans. While Chairman Powell receives much of the attention, the FOMC establishes Fed monetary policy. It’s the committee that sets the fed funds target rate and has other authority, including buying and selling of securities.


Rate hikes near an end, but high rates persist

While another Fed rate hike is possible this year, the markets are increasingly focused on when the Fed will begin to bring rates down. “The Fed needs to be convinced that it is on top of any risk of inflation’s resurgence,” says Haworth. “One challenge is that the Fed is able to try to temper demand as a way to ease pricing pressures, but it can’t really impact supply issues that arise.” Haworth points out that recent spikes in oil prices (due in large part to production cuts by Saudi Arabia and Russia) and ongoing shortages of labor that keep wages elevated are examples of supply issues that are mostly out of the Fed’s control.

With inflation remaining above the Fed’s 2% target, Hainlin says “any talk of cutting rates is premature. The Fed knows that there is a lagging effect to rate hikes, so they want to wait and see how inflation data evolves before making any moves in the other direction.”


Bond markets respond to events

The interest rate environment across the broader bond market has changed dramatically since early 2022. Yields have risen across the board. And in an unusual occurrence, yields on shorter-term Treasury securities are higher than the yield on 10-year and 30-year bonds. In late September 2023, the yield on 3-month Treasury bills stood at 5.56% and yields on 2-year Treasury notes at 5.12% compared to a yield of 4.35% on 10-year Treasury notes.9 This contrasts with normal circumstances, when investors demand higher yields for bonds with longer maturities.

Source: U.S. Department of the Treasury, Daily Par Yield Curve Rates.


Will the investment environment change?

As the Federal Reserve approaches what could be the peak in its current interest rate-hiking cycle, what does it mean for investors? Freedman says tighter Fed monetary policy is equivalent to steepening the ramp on a treadmill. “The Fed is producing more economic resistance, which will likely slow the level of economic growth,” according to Freedman. What’s not clear is the full effect the Fed’s actions will have on the economy or markets.

However, today’s market appears to offer opportunities for investors to return to more neutral portfolio positioning. Here are potential moves that may be appropriate for a diversified portfolio given the current environment:

  • Fixed income market. Today’s higher interest rates make fixed income securities more attractive. While higher yields can be earned in short-term debt instruments, it’s important to manage total portfolio duration by including long-maturity U.S. Treasuries to position a portfolio for the long term. Tax-aware investors may want to consider a modest allocation to high yield municipal bonds. Within certain non-taxable portfolios, consider a meaningful investment in non-government agency issued residential mortgage-backed securities while also utilizing long-maturity U.S. Treasuries to extend the portfolio’s duration. Trust portfolios may consider reinsurance as a way to capture differentiated cash flow with low correlation to other portfolio components.
  • Equity markets. Equities seem more attractively positioned than has been the case recently, but Haworth says investors should be prepared for choppiness in the markets. “Investors who have assets to deploy in the stock market may wish to consider dollar-cost averaging over a period of time (consistently investing over at least a six-month period),” he notes. This systematic investment approach has the potential to mitigate risks during volatile market periods, while still allowing investors to put money to work in equities to meet long-term goals.

Be sure to consult with your financial professional to review the positioning of your portfolio to determine if changes might be appropriate given your goals, time horizon and feelings toward risk given today’s higher interest rate environment.

Related articles

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With interest rates going up this year, what’s the likely ripple effect across capital markets?

How rising interest rates are impacting the bond market

With the Federal Reserve increasing interest rates to get inflation under control, what opportunities does this create for bond investors?


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  1. Mercado, Darla, “Fed recap: Details from the Federal Reserve’s July hike and Powell’s market-moving comments,”, July 26, 2023.

  2. New York Times, “Fed leaves rates unchanged: Powell speaks,” Sep. 20, 2023.

  3. Board of Governors of the Federal Reserve System, “Total Assets of the Federal Reserve, July 30, 2007 to April 27, 2022.” Total assets equal $8.938 trillion.

  4. Source: U.S. Bureau of Labor Statistics.

  5. Board of Governors of the Federal Reserve System, “Transcript of Chair Powell’s Press Conference Opening Statement, September 20, 2023.”

  6. Board of Governors of the Federal Reserve System, “Summary of Economic Projections,” Sep. 20, 2023.

  7. Source: U.S. Bureau of Economic Analysis.

  8. Source: U.S. Bureau of Labor Statistics, “Employment Situation Summary,” Sep. 1, 2023. Numbers reflect the 12-month change in average private nonfarm payroll wages.

  9. Source: U.S. Department of the Treasury, Daily Par Yield Curve Rates.

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