The Hike has stopped!

The Fed has stopped hiking its target interest rate and the economy remains largely resilient.  After a strong year results-wise in 2023, we are off to a better start in 2024 than most expected.  But the focus continues to be on the Fed and monetary policy to support the next leg of this bull market.  When are interest rate cuts, which have been hyped in the financial media since early December, going to start? How many will we see this year?  A growing amount of doubt has entered the equation recently.   The surprisingly sturdy US economy and a bump up in inflation readings have taken a rate cut in March off the table.  Likely the same for May.  Looking into the summer and beyond, it is now not a certainty that we will see cuts in the fed funds rate in 2024 at all. 

We think there are two potential paths in Fed Policy over the second half of this year. 

What if the Fed cuts rates?  Some say investors may be focusing on the wrong thing.  Mitch Zacks, Portfolio Manager at Zacks Investment Management said the most important takeaway currently is the Fed is prepared to cut rates while the economy is expanding.  Zacks points out that every time since 1971 the Fed has cut rates when the economy as not in recession, the S&P was up during the period. 

Many investors are still wondering what happened to the surefire recession predicted for 2023.  In fact, every rate hiking cycle in the last 70 years ended in recession and/or financial crisis.  We have seen some sectors that have slowed (think housing and manufacturing), but not the widespread economic malaise that typically follows a Fed tightening cycle. 

Some feel the economy is just not as interest rate sensitive anymore. Big sectors of the economy (like technology and healthcare) have become “asset-light,” which means less capital is needed for operations.  Less capital means less borrowing, lower debt costs, and thus companies less affected by higher interest rates. 

What if the Fed doesn’t cut in 2024?  This is becoming an increasingly likely scenario.  This line of thinking was partly encouraged by Inflation warming in January.  Core PCE rose .4% in the month of January, a significant increase from December.  The job market is still tight, with wage pressures still a concern.  Also, the economy is still running too hot for interest rate cuts.  Second half of 2023 GDP growth was 4.1%.

This is not necessarily a bad scenario for individual investors.  A world with lower-risk 7% bond returns, as an example can be attractive.  Bonds are generally less risky than equities, making it a potentially better situation for retirees and savers.  Overall, we feel rate cuts would be preferred for our clients, however the alternative, no rate cuts, is still an attractive scenario, especially for diversified portfolios.  We feel we’re appropriately allocated for the current environment.