Interest Rate Policy Changes Q3 2024
As has been the case for the past two plus years, the Federal Reserve's interest rate policy continues to be a key area of focus for markets, given its influence on inflation, economic growth, and overall financial conditions. The Fed kicked off the September policy meeting today and Chair Jerome Powell will communicate the committee’s decision on the policy rate moving forward. The Fed’s primary interest rate remains at a level that has persisted through much of the year as the central bank works to balance inflationary pressures with economic stability. The rate hikes initiated throughout 2022 and 2023 were intended to curb persistent inflation, which, while reduced, remains above the Fed’s target of 2%. The Fed is widely expected to announce a rate cut from the current 5.25% to 5.50% level. Investors anticipate the rate reduction will be either 0.25% or 0.50%.
Current Policy Stance
Recent Developments
- Inflation Moderation: Inflation has shown signs of cooling, with the latest readings of CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures) indicating that inflation has declined from its peaks. However, core inflation, which excludes food and energy, remains somewhat sticky, hovering around 3.5%.
- Employment & Growth: The U.S. labor market remains strong, with unemployment still near historic lows. However, signs of a slowing economy are emerging, as higher borrowing costs begin to affect sectors like housing and consumer spending. Recent GDP growth has been moderate, but the risk of a slowdown remains, particularly if the Fed maintains its restrictive monetary stance.
- Fed Communications: In its recent statements, the Fed has emphasized a commitment to bringing inflation back to the 2% target but is cautious about overtightening, which could lead to a more severe economic downturn. Chair Powell has consistently reiterated the importance of a gradual approach, balancing the risks of inflation with those of recession.
Implications for Investors
- Fixed Income: Higher interest rates have made short-term Treasuries and other bonds more attractive, offering higher yields than seen in over a decade. As rate policy potentially shifts, we will consider adding longer maturity bonds to lock in the current yields prior to significant rate reductions.
- Equities: While growth stocks have benefited from expectations of a Fed pause, any surprise hikes or a prolonged high-rate environment could weigh on market valuations, particularly in rate-sensitive sectors like technology and real estate. We will continue to favor defensive large cap sectors including consumer staples and utilities. Small cap stocks also appear attractive given the relatively moderate valuations and may potentially benefit from lower financing costs. We intend to add exposure in this space in the coming weeks.
- Housing Market: The housing sector has seen a notable slowdown, with mortgage rates remaining elevated, making home financing less accessible. However, this may present opportunities for real estate investors focused on rental markets, as homeownership affordability declines. Lower rates will eventually alleviate the housing price pressure, but this could take some time given the Fed’s likely elongated rate reduction path.
As we move into the final quarter of 2024, Fed policy will remain a dominant theme in the markets. Investors should prepare for continued volatility, stay diversified, and closely monitor economic data releases and Fed communications for any shifts in interest rate expectations. While the outlook for a rate cut appears imminent, inflation data and labor market resilience will dictate the Fed's course of action.
Thank you for your continued trust and partnership. Reach out to your team at Vista with any questions.
Sincerely,
Lincoln Sorensen
Family Wealth Advisor & Co-Founder