The Federal Reserve held its key interest rate steady Wednesday for the fifth consecutive meeting, as the central bank awaits more data to determine when to cut rates.
Fixed-income markets were buzzing with anticipation with the expectation that the U.S. Federal Reserve would maintain interest rates at their current level. The last interest rate increase was in July 2023. However, markets expected the Fed to cut rates no later than July 2024, perhaps as soon as May.
Key decisions regarding monetary policy are made at Federal Reserve (Fed) meetings, which significantly impact the economy and financial markets. During these meetings, the Federal Open Market Committee (FOMC) assesses various economic indicators, such as inflation, employment, and GDP growth, to determine the appropriate course of action.
One of the primary tools at the FOMC's disposal is setting the federal funds rate, which influences economic borrowing costs. Additionally, the FOMC discusses and debates other monetary policy measures, such as quantitative easing and forward guidance.
The outcome of these meetings, including any changes in interest rates or policy statements, is closely watched by investors, policymakers, and the general public. It provides insights into the Fed's economic outlook and future policy actions. FOMC meetings are held behind closed doors but are recorded and transcribed.
The minutes of each meeting are typically released three weeks after the policy decision date, while the transcripts become available with a five-year delay.
For the fifth consecutive meeting, the Federal Reserve opted to maintain unchanged interest rates and indicated its intention to reduce rates three times in 2024, despite recent data indicating that inflation has proven more persistent than anticipated.
The decision by the Federal Open Market Committee (FOMC) implies that the Fed's primary benchmark interest rate will remain within its existing target range of 5.25-5.5 percent, marking a 23-year high.
Over the last couple of years, the Federal Reserve has implemented significant rate hikes to combat the highest inflation levels seen in decades. However, despite the ongoing challenges faced by Americans due to elevated interest rates and inflation, Fed Chair Jerome Powell indicated that the central bank is not yet prepared to decrease borrowing costs. Yet.
Officials also lifted forecasts for where they see rates settling over the long term, boosting their median estimate to 2.6% from 2.5%; the change implies rates will need to stay higher for longer in the future.
The Federal Reserve ended 2023 on a positive note, as inflation decreased more quickly than initially anticipated, as indicated by recent data from the Department of Commerce.
However, the consumer price index (CPI) indicates that inflation is not decelerating as rapidly as previously observed. Price pressures have remained relatively stable at around 3 percent for the past four months, supporting Fed Chair Jerome Powell's assertion that achieving the final stretch of lowering inflation to their targeted 2 percent may pose significant challenges.
Powell noted at the Fed’s post-meeting press conference, “We’re not going to overreact to these two months of data, but we’re not going to ignore them. We don’t really know if this is a bump on the road or something more. We’ll have to find out.”
Employment figures are also a key component of the Fed's dual mandate, as achieving maximum employment is one of its primary objectives. A robust labor market reflects a healthy economy and can contribute to sustained economic growth. Therefore, the Fed monitors employment indicators, such as unemployment rates and wage growth, to measure the health of the labor market.
Recent employment data has shown reasonable strength, allaying concerns about an impending recession that might necessitate Fed-rate cuts. The committee is projecting a 2024 U.S. unemployment rate of 4.0%, down from 4.1% in December.
Strong employment data may suggest that the economy is operating near full capacity, potentially signaling upward pressure on wages and inflation. In such scenarios, the Fed might consider tightening monetary policy to prevent overheating and maintain price stability.
The meeting yesterday also projects:
The Federal Reserve's announcement holds significance because it affects how much interest consumers pay when borrowing money. Various borrowing costs, such as adjustable-rate mortgages, auto loans, and to some extent, 30-year fixed-rate mortgages, have remained at their highest levels in over a decade due to the Fed's efforts to slow down economic growth. Additionally, credit card rates are currently at their highest levels ever, based on data from Bankrate.
While Fed officials anticipate being able to lower borrowing costs later this year, they are exercising caution to avoid providing too much stimulus to the financial system prematurely.
Investors have been highly optimistic lately, as shown by the S&P 500 hitting 18 record highs in the first four months of 2024. This is happening even though it seems the Federal Reserve won't lower interest rates as much as investors thought. At the end of 2023, investors predicted there would be seven rate cuts, but now they're only anticipating three because inflation has been stronger than expected for two months.
However, markets can change suddenly, especially if the U.S. economy starts doing better than expected. But if you're investing for at least five years, don't worry too much about short-term ups and downs. Stick to your long-term plan, and see market dips as chances to buy more. Also, make sure your investments are spread out to protect against market risks.
We likely won’t see rate cuts until September. Now, the political landscape will also surely have some sway in decisions made.
Talking heads this morning are saying the future Fed rate indicator could go up because of higher CPI numbers than expected over the past several weeks. We believe in a portfolio unaffected by these types of constant emotional and economical chess moves.
In times of uncertainty surrounding the Federal Reserve's decisions and their potential market impact, a financial advisor can be crucial in guiding investors. Here are a few ways they can help:
At NJM Wealth Preservation Strategies, our advisors assist clients in navigating market volatility and adjusting investment strategies accordingly. We offer personalized insights tailored to individual financial goals, risk tolerance, and time horizons, helping ensure alignment with long-term objectives.
We use proven finance strategies designed to meet your risk tolerance and withstand market volatility. You can count on unbiased recommendations and impartial guidance based directly on your needs and goals.
What’s next for The Federal Open Market Committee? The FOMC is scheduled to announce monetary policy decisions at 2 p.m. ET on the following dates in 2024:
Like this month’s meeting, the June, September, and December sessions will include a Summary of Economic Projections, where policymakers update their forecasts for interest rates and other key economic variables.
Monetary policy decisions will be followed by a press conference with Chair Jerome Powell 30 minutes after each announcement. In addition, three weeks after each meeting, the Fed will release minutes from its discussions, offering further context on decision-making.
The March FOMC meeting displayed higher economic growth, lower unemployment, and slightly higher inflation during 2024 than previously estimated in the December 2023 SEP. These factors contributed to the Fed removing one potential rate cut from its 2025 projections, while the long-term estimate of achieving 2% inflation remains sometime in 2026.
In the immediate future, Powell said cuts could come “at some point this year,” stopping short of saying whether the Fed’s first cut could come at its next meeting in May or June. The takeaway, however, is that the latest inflation data hasn’t harmed their confidence that the economy is getting back on track.
“They haven’t really changed the overall story,” Powell said of the latest figures, “which is that of inflation moving down gradually on a sometimes-bumpy road toward 2 percent. … This is why we are approaching this question carefully.”
If you have questions about the economy and its effects on your investments and savings, reach out to us here today to schedule your complimentary consultation.