2024 Investment Outlook

Capitalizing on today’s market opportunities to meet your financial goals.

Key takeaways

  • As it has since late 2023, the Federal Reserve continued to hold the line on interest rates at its March 2024 meeting of the Federal Open Market Committee.

  • It marked the fifth consecutive meeting with no change to interest rates after the Fed raised rates eleven times between 2022 and 2023.

  • Fed officials have indicated as many as three rate cuts may be coming later this year.

As investors await the April 30-May 1 meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC), they’ve adjusted to an environment marked by changing expectations. Prospects for interest rate cuts appear to be on hold for now. The Fed has indicated that the fed funds rate it controls may be at a peak for the current cycle (in the 5.25% to 5.50% range, its highest level since 2001). The Fed opened the door to rate cuts in 2024 after recent FOMC meetings. However, a series of economic developments have likely contributed to the Fed’s wariness about cutting rates prematurely.

Chart depicts the Federal Reserve's target federal funds rate 2000-March 20, 2024.
Source: U.S. Federal Reserve, March 20, 2024.

After the FOMC’s March 2024 meeting, a report released by its members continues to project three cuts to the fed funds rate this year.1 The flow of economic data since that time has led to growing skepticism among market participants that the Fed can follow through on this projection. “We’ve seen a meaningful inflation slowdown,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Yet inflation remains a bit sticky, and the Fed realizes that once they start with rate cuts, it is hard to stop doing so in future meetings.” In a statement released after its March meeting, Fed Chair Jerome Powell stated, “The Committee does not expect it will be appropriate to reduce the (fed funds) target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”2

Inflation, as measured by the Consumer Price Index (CPI), stood at 3.5% in March, raising some concerns as it represents an uptick from previous months. 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 February compared to the previous year. The core PCE news was encouraging to the extent that it represents its lowest reading in almost three years, but further reduction to the Fed’s 2% target remains elusive.4

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 1.4 available workers from every open job in the United States.


Markets react to Fed policy signals

Investors appear to be recalibrating expectations in light of recent economic developments and Fed signals. After the Fed first indicated in late 2023 that fed fund rate cuts were on the table, 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 in April’s first half. In that period, the S&P 500 dropped 2.5% while the benchmark 10-year U.S. Treasury yield jumped from 4.20% to 4.50%. Bonds, as represented by the Bloomberg Aggregate Bond Index and as measured on a total return basis, declined 1.75% in April’s first two weeks (bond prices fall when yields rise).5

“We’ve seen a meaningful inflation slowdown,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Yet inflation remains a bit sticky, and the Fed realizes that once they start with rate cuts, it is hard to stop doing so in future meetings.”

Inflation’s stickiness

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

Chart depicts changes to the Consumer Price Index: June 2022 - March 31, 2024.
Source: U.S. Bureau of Labor Statistics. As of Mar. 31, 2024.

“The Fed has had opportunities to change its 2% annual inflation target, and it hasn’t done so,” says Freedman. “Despite its progress since early 2022, current inflation is still above the Fed’s target rate. But we think the Fed will have to start cutting rates before inflation drops to 2%.” In fact, the FOMC’s projections indicate its expectations are that inflation will remain above 2% in 2024 and 2025, even as the FOMC likely implements rate cuts over those two years.1


Reducing the Fed’s balance sheet

Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management, anticipates that the Fed may scale back its “quantitative tightening” strategy. This approach has seen the Fed reduce its bond holdings since mid-2022 at a rate of $95 billion per month. “At some point, the Fed may consider slowing the pace of their tapering,” says Haworth. “Though 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.” 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.6 While the Fed intends to continue reducing its balance sheet for now, Fed Chair Jerome Powell said in March that “it will be appropriate to slow the pace of runoff (balance sheet reduction) fairly soon, consistent with the plans we previously issued.”2

Chart depicts dollar amount of assets on the Federal Reserve’s balance sheet between April 2022 and April 10, 2024.
Source: Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets (Less Eliminations from Consolidation), retrieved from FRED, Federal Reserve Bank of St. Louis. As of April 10, 2024.

The U.S. economy holds its ground

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%. In addition, it sent encouraging signals on the labor front, anticipating fairly stable conditions. The FOMC projects employment at 4.0% for the year, not far from the most recent reading of 3.9%.1 While wage growth has been one driver of inflation in recent times, Powell stated in March that “wage increases have been quite strong, but they are gradually coming down to levels that are more sustainable over time,”2 indicating the Fed sees a diminishing inflation threat from current wage growth trends.


Role of the Fed

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.


Will the investment environment change?

What do recent economic and market developments mean for investors? Today’s market appears to offer opportunities 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 markets. While higher yields can be earned in short-term debt instruments, it’s important to also consider longer-maturity U.S. Treasuries as well to help support portfolio diversification. “You don’t want to invest just with a 30- to 90-day outlook,” says Haworth. “You want to look at what’s going to work more effectively to help you meet your long-term goals.” Haworth notes that there’s favorable investor sentiment toward corporate bonds, municipal bonds (for tax-aware investors) and collateralized loan obligations. “These types of securities offer a way to enhance yields, and from a quality standpoint, they are holding up fairly well in the current economy,” says Haworth. Within certain non-taxable portfolios, explore a meaningful investment in non-government agency residential mortgage-backed securities. Trust portfolios may consider reinsurance to capture attractive income with low correlation to other portfolio components.
  • Equity markets. Stocks began 2024 by retaining the upward momentum that emerged in 2023’s closing months, but with some volatility along the way as investors try to decipher the Fed's rate cutting intentions. “The high interest rate environment is taking a toll on utilities and real estate stocks, which benefit from lower rates,” says Haworth. “In the first three months, the rest of the market seemed to benefit from generally positive economic data.” Most parts of the market gave back a portion of those gains in early April. Haworth says investors should not hesitate to put money to work in equities but should be prepared to experience some choppiness. “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).” This systematic investment approach has the potential to mitigate risks during volatile market periods, while still positioning assets 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 evolving interest rate environment.

Frequently asked questions

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  1. Board of Governors of the Federal Reserve System, “Summary of Economic Projections,” March 20, 2024.

  2. Board of Governors of the Federal Reserve System, “Transcript of Chairman Powell’s Press Conference Opening Statement,” March 20, 2024.

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

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

  5. Bloomberg, “Fixed Income Indices,” as of April 12, 2024.

  6. Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets (Less Eliminations from Consolidation), retrieved from FRED, Federal Reserve Bank of St. Louis. As of March 13, 2024.

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