Market Update

March 20, 2024

The Fed Leaves Rates Unchanged

What’s important

• The Federal Reserve (the Fed) today unanimously voted to maintain the current policy rate (basis points, or bps), leaving the Fed Funds Target Rate unchanged at 5.25% to 5.50%. This continues to represent the highest target range in over 22 years, though this pause also represents the fourth consecutive meeting at which the Fed has declined to adjust its policy rate.


• The official statement (OS) was almost entirely unchanged, with the only update in the categorization of job gains — from “moderated since early last year” in the January OS to “remained strong” in the most recent version. No official update on the pace of quantitative tightening was offered, other than the Fed will begin adjusting the pace of runoff “fairly soon.” 


• The market reaction was fairly muted, as Federal Reserve Chairman Jerome Powell did not seem to take a definitively dovish tilt during his press conference and offered little in the way of guidance for rates.

Fixed income

• Rates markets rallied slightly, primarily on the release of the Fed’s “dot plot” that shows the Federal Open Market Committee (FOMC) expectations for interest rates. The maintaining of the status quo of three cuts in 2024 despite stronger-than-anticipated inflationary data was well received by markets, with a roughly 5-bp move downward seen in the U.S. 10-year Treasury area of the yield curve. Powell’s press conference failed to move rates in any concrete direction, as he did not appear to offer any timeline for when rates may be cut.


• We remain defensive in our credit positioning but do seek to increase investment-grade exposure tactically and selectively in corporate bonds, with the expectation that spreads should be resilient over the next six months. We continue to favor higher in credit quality (as we expect credit spreads to leak wider on the expected economic weakness). We advocate shifting from cash to the two- to five-year area of the U.S. yield curve in order to take advantage of potential price appreciation as well as locking in an attractive carry yield in advance of broadly declining rates. Within tax-exempt markets, we believe essential service municipals are better positioned for an economic downturn. We prefer active fixed income portfolio management, and fundamental credit selection will offer opportunities in these volatile times.

Equities

• U.S. equities responded favorably to the outcome of the FOMC meeting this afternoon, advancing on the auspices of the eventual easing of policy even as uneven pricing pressures have poured cold water on the hopes of an earlier cutting cycle. Powell reiterated his commitment to the dual elements of the body’s congressional mandate and communicated confidence that economic growth should remain resilient while inflation makes progress, albeit at a nonlinear pace. Powell articulated his belief that it will be prudent to begin cutting interest rates at some point this year, helping to propel cyclical and rate-sensitive segments of the equities market. Overall, the S&P 500 ended slightly higher for the day. Consumer Discretionary, Financials and Communication Services led while Small Caps added 1.9%.


• In our view over the intermediate term, we expect equities to enjoy a supportive backdrop as the nominal growth outlook evolves in a positive mix-shift toward cyclical expansion and monetary policy eases. However, we caution that progress is unlikely to be linear, and we would expect a sawtooth pattern of improvement. We expect a period of cyclical expansion will help allow for some equity segments to emerge from the shadows of mega-cap leadership, with opportunities for certain pockets including those more sensitive to the U.S. growth cycle, such as Small Caps, to enjoy a mean-revert toward higher levels.

Going forward

• This meeting will be mostly remembered for the FOMC maintaining three interest rate cuts in 2024, despite its view of slightly higher inflation readings projected for later this year. We think this speaks to the Fed’s desire to take its time with analyzing the data before cutting interest rates. The Fed is correct in saying that the strong economy is favorable to it, as this provides more time to digest inflationary and labor readings. We continue to believe that the first cut should come in June, although things could get murkier if March, April and May inflationary readings are similarly strong as they were the first few months of the year.


• We do believe that the Fed now has rates at a level to fight inflation as policy rates are at a sufficiently restrictive level and the Fed has indicated that it is likely hold them there until inflation continues moving closer to its 2% target.


• As markets further struggle with a 5%+ terminal rate (the level at which the Fed is expected to stop raising interest rates), we expect pockets of volatility across equities and fixed income, especially as geopolitical risk remains elevated. We believe the Fed will remain fully data dependent, and Powell reiterated that many times in his press conference. Over the past few months, inflation has moved in the right direction; however, the February inflation report was higher as compared to prior months. February’s high inflation data will leave the Fed data dependent regarding future interest rate cuts.