Weekly Market Perspectives: Fed holds, investors cheer

Published: March 25, 2024

Last week, attention was focused on the Federal Reserve and the anticipated path for policy. While market expectations for the timing of future rate cuts have diverged from policymaker’s for several months, last week markets were forced to re-price expectations closer to what Fed Officials have been communicating all along—higher for longer.

Chair Jerome Powell delivered the widely expected decision to maintain current interest rates and emphasized a ‘wait and see’ approach in light of stronger than anticipated growth and inflation figures. While noisy inflation data has caused minor consternation, the Fed still believes price increases are headed towards their long-term target, with three rate cuts in 2024 still the most likely scenario.

As such, the interest rate decision and subsequent press conference did little to disrupt the ongoing market rally. No news was good news for the market, which is now well aligned with the Fed on upcoming rate cuts. The supportive Fed helped lift risk-assets on the week—the S&P 500 Index closed higher by 2.3% and the US Aggregate Bond Index was up 0.7% as interest rates fell modestly across the curve.

S&P 500 Index Notches Best Week of 2024 on Resolute Fed

Source: Bloomberg.

Markets brushed aside the Federal Reserve release and powered to new all-time highs on Thursday before a slight pullback. If the market can push through sustained inflation and delayed rate cuts, then the market narrative is back to broad macroeconomic strength.

# of Market Implied Rate Cuts in 2024

Source: Bloomberg.

The Fed’s Open Market Committee unanimously opted to leave the Fed Funds target range at 5.25% to 5.50% for a fifth straight meeting, while signaling three cuts remain the target for 2024. The only notable change from the prior meeting is they now see just three rate cuts in 2025, down from four indicated in December, and the long-term Fed Funds target rate rose modestly from 2.5% to 2.6%, a minimal change to the market outlook. Perhaps one reason for the slightly higher long-term rate is that Fed Officials are now forecasting medium- and longer-term inflation to be higher than previously expected. Some interpret this as a signal the Federal Reserve is willing to tolerate modestly higher inflation if it means the economy can maintain the current level of growth.

Implied Federal Funds Rate
Federal Reserve Expectations vs Market-Implied

Source: Bloomberg, Federal Reserve.

There has been a keen focus on the timing of the first cut – cut too early as risk re-accelerating the economy as well as inflation; or cut too late and risk the economy falling into a recession. With only six meetings left in 2024, the first rate is coming into sharper focus with traders currently favoring the June meeting.

– Written by Eric Schmitz, CFA