May 6, 2024

Rate Cuts Still on the Table, Timing Less Certain

Weekly Market Commentary

We often discuss the Federal Reserve and interest rates because both greatly impact investors. For starters, changes in interest rates have a significant impact on stock prices and income earned on savings.

Sharply higher rates in 2022 pushed equities into a bear market. The pause in rate hikes in 2023, coupled with continued economic growth and the craze surrounding AI, led to a new bull market.

Wednesday’s Fed meeting left rates unchanged—no surprise. How Fed Chief Jay Powell might frame the meeting was uppermost on the minds of investors.

Given stubbornly high inflation, would Powell shift gears and take on a more hawkish tone, even signaling the possibility of another rate hike this year? Or would he emphasize that current interest rates are high enough to bring the rate of inflation back down?

Despite the recent uptick in the rate of inflation, Powell said, “It’s unlikely that the next policy rate move will be a hike.” The Fed, he said, would require “persuasive evidence” before hiking rates again, setting a high bar for another rate increase.

He made no mention of:

  • Inflation becoming entrenched,
  • The need to be vigilant against inflation, or
  • The lessons and mistakes of the 1960s/70s.

And he sidestepped a question about whether Fed officials discussed a rate hike at the meeting.

But he said the Fed is in no hurry to reduce interest rates, though he did not rule out the possibility of a rate cut this year.

Overall, the Fed’s approach was less aggressive than some had feared.

Taking a 2024 rate hike off the table encouraged bullish sentiment, and he left the door open to an easier policy. But the Fed’s next move will largely be dependent on the economic outlook and inflation.

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A Steady-as-She-Goes Fed and a Tame Inflation Report

As expected, the Federal Reserve announced last Wednesday that it held its key rate, the fed funds rate, unchanged at 5.25 – 5.50%. The Fed left the door open to a cut in rates later in the year if inflation makes meaningful progress toward its 2% annual goal or if there is an unexpected weakening in the labor market.

Strong Jobs Report, with a Caveat

The U.S. Bureau of Labor Statistics reported that nonfarm payrolls in May rose 272,000, easily beating expectations of 190,000 per the Wall Street Journal. Over the past three years, nonfarm payrolls have usually topped expectations. That narrative remains intact.

Housing Prices Hit New Record

The price of a home hit a new record, according to the latest data on housing prices. The S&P CoreLogic Case-Shiller 20-City Home Price Index, which measures monthly housing prices in 20 major metropolitan areas, rose 1.6% on a nonseasonally adjusted basis in March.

Drifting Higher

Stocks have been drifting higher for several weeks as investors search for a catalyst that could drive shares in either direction. Interest rates can influence market direction, but there hasn’t been much news recently on the rate front.

How Do Investors Spell Relief?

Investors celebrated an ‘in line with expectations’ CPI that suggested the rate of inflation isn’t accelerating. It’s a small win, but it was enough to send the three major market indexes, the Dow, the Nasdaq, and the S&P 500 to new highs.