As some anticipated, the Federal Reserve held interest rates steady at its September policy meeting. The Fed had raised its benchmark federal funds rate at their July 2023 meeting to a range between 5.25% and 5.5%, a 22-year high. Fed Chairman Powell suggested that they were prepared to raise rates one more time this year, at either of their two remaining meetings, to combat inflation.1
While inflation is well down from its 9.1% peak last year, it’s still higher than the Fed’s target. Their projection for annual core inflation, which excludes volatile food and energy prices, is 3.7% for the fourth quarter, above their 2% target.1
Since rates may be raised again, economic pundits have called the Fed’s latest decision to hold rates steady a “skip” instead of a “pause.”
Rates Higher for Longer
The Fed has been lifting rates since March 2022 to cool the economy without causing a recession. It’s a tough act to pull off. In his press conference, Powell said, “a soft landing is our primary objective.” But if inflation remains stubbornly high, he added, “the worst thing we can do is to fail to restore price stability.” With economists lowering their calls for a recession in 2024, Powell may be able to thread the needle.2
However, with 2023 economic growth stronger than anticipated, most Fed officials expect they will need to keep interest rates near their current level through next year. The median projections showed the fed funds rate being lowered to around 5% by the end of 2024. That would imply two rate cuts next year if the Fed hikes again this year. Further rate cuts may be pushed into 2025.
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On Wednesday, the stock market reacted negatively to the Fed’s update. But since 1984, when the Fed has stopped its rate-hiking cycles, stock prices have trended higher. The medium returns of the S&P 500 for the 3-, 12- and 30-month periods after the Fed’s tightening cycle ends were +7.7%, +19.1%, and +62%, respectively. Of course, past performance is no guarantee of future results.3
As always, if you have any questions, we’re just a phone call or email away.
1. WSJ.com, September 20, 2023
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