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In a widely anticipated move, the Federal Open Market Committee has opted once again to maintain its current target fed funds interest rate range of between 5.25% and 5.5%.
The Federal Reserve has not adjusted interest rates since July 2023, but many investors are hopeful the Fed will finally pivot from rate hikes to rate cuts in the near future.
A combination of pent-up consumer demand, supply chain disruptions and a tight labor market sent inflation soaring to 40-year highs in 2022. The FOMC began raising interest rates in March 2022 in an attempt to bring inflation down to its 2% long-term target.
Fortunately, inflation has trended steadily lower for most of the past two years, allowing the Fed to take its foot off the gas pedal and pause its rate hikes. The Fed has seemingly reached the terminal interest rate of the current cycle, but economists disagree on how long rates will stay at 22-year highs before the Fed starts cutting.
A Soft Landing for the Economy?
The FOMC is attempting to navigate a “soft landing” for the U.S. economy by tightening monetary policy to bring down inflation without tipping it into a recession. Higher interest rates weigh on corporate earnings growth by increasing borrowing costs for both companies and consumers.
If the Fed feels it is safe to lower rates, that’s a sign that inflationary pressure has subsided. Lower rates would also make it less costly for consumers and corporations to spend. As for the stock market, returns tend to be better than average in the immediate wake of rate cuts.
In addition, on Wednesday, the Fed also said it will continue to allow up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature and roll off its nearly $7.7 trillion balance sheet per month in its ongoing battle against inflation.
Why does that matter to Main Street? By shrinking its balance sheet, the Fed lowers demand for government bonds and mortgage-backed securities.
The downside is that the ensuing rise in long-term interest rates dampens the housing market. The upside, however, is that those actions help cool the economy, which lowers inflation. That’s a key goal for the Fed.
Inflation and Interest Rates
Earlier this month, the Labor Department reported the consumer price index rose 3.4% year-over-year in December, up from a 3.1% gain in November but still down from a 40-year high of 9.1% in June 2022.
In late January, the Commerce Department reported the core personal consumption expenditures price index was up 2.9% in December. That was down from a 3.2% year-over-year gain in November.
Core PCE excludes volatile food and energy prices and is the Federal Reserve’s preferred inflation measure. Its long-term target for core PCE inflation is just 2%.
“Inflation is still too high, ongoing progress in bringing it down is not assured and the path forward is uncertain,” Fed Chair Jerome Powell said in his post-meeting press conference on Wednesday.
U.S. Labor Market vs. Inflation
The U.S. labor market has remained tight, making the Fed’s fight against inflation more difficult.
Earlier in January, the Labor Department reported the U.S. economy added 216,000 jobs in December. That exceeded economist estimates of 170,000 new jobs. The U.S. unemployment rate remained at just 3.7%, while wages were up 4.6% year-over-year in December, higher than expected.
Powell said Wednesday that U.S. labor market conditions have improved.
“As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals are moving into better balance,” Powell said.
“We know that reducing policy restraint too soon or too much could result in a reversal of the progress we’ve seen on inflation and ultimately require even tighter policy to get inflation back to 2%,” he said.
Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report, says strong jobs and GDP growth coupled with elevated consumer confidence allowed the Fed to maintain interest rates at current levels.
“Our base case view is for a first rate cut in the May to June 2024 window. We maintain our bullish view for the economy and stock market, with inflation cooling and economic data continuing to come in strong,” Tentarelli says.
Economic Outlook
Still, Federal Reserve economists are anticipating a difficult 2024 for the U.S. economy. In December, Fed officials projected a median fed funds rate of 4.6% in 2024 and indicated just three rate cuts are likely in 2024.
The FOMC projects the U.S. unemployment rate will rise to 4.1% in 2024. U.S. gross domestic product, or GDP, grew 3.3% in the fourth quarter, but the Fed projects full-year GDP growth of just 1.4% in 2024 and 1.8% in 2025.
While inflation will likely continue to trend lower, the Fed projects core PCE inflation of 2.4% this year. That would still be above the Fed’s 2% target.
Despite persistent inflation and elevated interest rates, investors have piled into stocks and other risk assets in recent months as concerns over a hard landing for the U.S. economy have dissipated. The is already up 2.9% already in 2024. The widely followed benchmark for the broad market recently made its first new all-time high in over two years.
The stock market’s 2023 rally has carried over into 2024 despite lackluster S&P 500 earnings growth. S&P 500 companies are on track to report a 1.4% year-over-year decline in earnings in the second quarter. That would be the fourth year-over-year earnings contraction in the past five quarters. But looking ahead, analysts are projecting 2024 S&P 500 EPS will rebound by 11.6%.
The S&P 500 dipped to new intraday lows on Wednesday, following the FOMC announcement.
Will the Fed Hike Rates at Its March Meeting?
According to CME Group, markets are currently pricing in a 63.5% chance the Fed will begin cutting interest rates at its next meeting in March.
However, investors and central bankers have roughly seven weeks of economic data to monitor between now and then. That could have a significant impact on monetary policy.
Jeffrey Roach, chief economist at LPL Financial, says the FOMC simply needs to gain more confidence that inflation will continue to ease.
“As long as supply pipelines remain unclogged and firms do not pass along higher transportation costs to the consumer, we could expect a cut at the next meeting,” Roach says.
“Risk assets should benefit as the Fed moves into a new era of monetary policy.”
What’s Next?
In the near term, many investors will eagerly await the Labor Department’s January jobs report on Friday, February 2.
Also, several big-name tech companies are due to report second-quarter earnings in the next two weeks. Among the companies slated to report are Meta Platforms (META), Cisco Systems (CSCO), Amazon (AMZN) and Apple (AAPL).
Shares of Google parent Alphabet (GOOG, GOOGL) traded sharply lower in Wednesday’s session following a disappointing fourth-quarter earnings report. Microsoft (MSFT) shares also dropped after the company’s guidance didn’t meet the market’s high expectations.
In addition to the jobs report, investors hope to see confirmation that inflation is still trending lower when the Labor Department releases its January CPI reading on February 13.
Federal Open Market Committee (FOMC) FAQs
What is the Federal Reserve?
The Federal Reserve is the central bank of the United States, and is generally considered to be the most powerful central bank in the world. Often referred to as the Fed, it was founded to direct monetary policy and manage the financial system. A seven-member board governs the Fed, and there are 12 Federal Reserve Banks in regions throughout the U.S.
What is the FOMC?
The Federal Open Market Committee (FOMC) is the main policy making body of the Fed. The FOMC sets the federal funds target rate and makes other monetary policy decisions for the Fed. The FOMC meets eight times a year to vote on interest rates and policy priorities.
Who is on the FOMC?
There are 12 members of the FOMC:
- The seven members of the Fed Board of Governors, led by Fed Chair Jerome Powell.
- Five of the 12 Federal Reserve Bank presidents, although the head of the Federal Reserve Bank of New York is a permanent member of the FOMC. The other four voting positions are filled on a rotating basis by the presidents of the other Federal Reserve Banks across the country. Even though most presidents don’t vote, they can all attend the meetings and debate policy.
When is the next FOMC meeting?
The next FOMC meeting is scheduled for March 19-20, 2024. The FOMC hold eight scheduled meetings a year, one every six weeks or so. The committee can also meet whenever it feels necessary and believes that it needs to act, such as during a financial crisis.
When are the FOMC minutes released?
The FOMC releases minutes of its meetings three weeks after the most recent meeting. A full transcript isn’t available for a full five years after a meeting.
How many times will the FOMC raise rates in 2024?
The FOMC has raised interest rates 11 times since early 2022, putting the federal funds target rate at 5.25% to 5.50%. However, the Fed has paused rate hikes at its last three meetings of 2023.
CME’s FedWatch tool currently forecasts a more than 60% chance that the Fed will lower rates at its first meeting in 2024.
