The Federal Reserve maintains its stance on multiple interest rate cuts for the remainder of the year, despite persistent inflationary pressures, offering reassurance to investors.
Key Points:
- The Federal Reserve’s policy-setting Open Markets Committee has chosen to keep the target federal funds rate unchanged within the 5.25% to 5.5% range, consistent with its position since the previous summer.
- Notably, the Fed staff’s median year-end forecasts project a reduction of 75 basis points in interest rates, despite concerns raised by higher-than-expected inflation data in early 2024.
- Market response to the Fed’s announcement was positive, with 10-year U.S. Treasury yields slightly decreasing and the S&P 500 index registering a slight gain immediately afterward.
- While the Fed’s median long-term interest rate forecast has seen a slight increase from 2.5% to 2.6% between December and March, economists warn that interest rates are likely to remain significantly higher than those observed over the past decade.
Anticipated Rate Cuts:
- Market expectations suggest that the first rate cut since March 2020 may occur at the Fed’s June meeting, with a 55% probability according to “Fed swap” futures contracts tracked by CME Group’s FedWatch Tool.
- Subsequent rate cuts are anticipated, with a 49% probability for July and a minimal 7% likelihood for May. The most probable scenario by year-end is a total reduction of 75 basis points, a considerable decrease from the 150 basis points indicated in January.
Insights:
- Initially, investors had targeted this Fed meeting as the anticipated date for the first rate cut, signaling a shift in the current tightening cycle. However, futures contracts implied a nearly 90% chance of rate cuts by March at the end of December and January, according to the FedWatch Tool.
Background:
- Recent inflation data for January and February revealed persistent price increases, challenging expectations for a more accommodative stance from the Fed following the rate hikes in 2022-23 aimed at curbing inflation.
- Despite the rate hikes, major U.S. stock indexes have shown resilience, with the S&P 500 rebounding from its 2022 losses to achieve new all-time highs in 2024, although smaller-cap indexes like the Russell 2000 remain below their 2021 peaks.