The Fed stays the course, but rate cuts could be coming

The Federal Reserve kept interest rates unchanged yesterday, holding the federal funds rate steady at 5.25-5.50%.

This marks the fourth consecutive meeting where rates have been left alone after a year of aggressive rate hikes aimed at taming inflation.

While the Fed removed prior language about needing “additional firming”, they made it clear they are not ready to cut rates yet, stating “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

• This signals the Fed will likely keep rates elevated for longer until they see clear evidence that inflation is on a downward trajectory toward their 2% target.
• However, the removal of the tightening bias suggests the Fed sees the end of its rate hike campaign on the horizon.

The Fed also noted solid economic growth and a strong job market, though they continue to monitor risks related to high inflation.

Key takeaways:

• Rates to remain unchanged for now after aggressive 2023 hikes
• Fed focused on bringing down inflation before considering cuts
• Still expects “higher for longer” policy until inflation moves toward 2% target
• Removal of tightening bias signals rate hikes have likely ended

“While the Fed is not ready to cut rates yet, yesterday’s announcement sets the stage for potential rate cuts later this year if inflation continues trending down,” said Tobi Opeyemi Amure, an analyst at Trading.Biz.

He added, “I expect the Fed to move to a neutral stance in the next few meetings before turning more dovish in the second half of 2024 as inflation moves back toward their target.”

Markets initially sold off on the Fed’s more hawkish than expected tone, signaling investors were hoping for earlier rate cuts.

• Equities fell 1-1.5% as rate cut hopes were pared back
• 10-year Treasury yield ticked slightly higher on reduced easing expectations

However, the Fed’s confidence in economic growth and removal of tightening bias suggests we are nearing a policy pivot point.

• Markets could rally later this year on actual rate cut progress
• Attractive valuations in equities if earnings hold up with solid growth

The Fed emphasized uncertainty in the economic outlook and said they are “highly attentive to inflation risks,” meaning policy flexibility will be key.

The Fed is laser-focused on restoring price stability before they consider lowering rates, but the tide is turning toward potential easing later this year if current trends continue. Investors may need to stay patient for policy to turn more accommodative, but solid economic fundamentals and early-stage rotations could make equities attractive for long-term investors.