FOMC, Powell Give Investors The Warm Fuzzies

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Markets enjoyed a bullish day of trading today, pushing higher from flat levels upon the latest output from the Federal Open Market Committee (FOMC) at 2pm ET. The Fed’s “dot-plot” still allows for three 25 basis-point (bps) cuts in 2024, likely to start — but not committed to — at the June meeting. Markets jumped on the news, finishing at or near session highs on the Dow (+401 points, +1.03%), S&P 500 (+0.89%, notching a new all-time record close) and the Nasdaq (+202 points, +1.25%). The small-cap Russell 2000 drooped into the closing bell, but was still up +1.92% on the day.

This marks the fifth-straight Fed meeting where no move on interest rates was taken. We remain at 5.25-5.50% — the “higher for longer” Fed Chair Jerome Powell had been advertising since the Fed began making moves higher two years ago — which is the highest we’ve seen interest rates since 2001. In his press conference following the FOMC release, Powell said the monetary policy body now has “greater confidence” that inflation is coming down to 2%.

Three rate cuts in 2024 would take us down to the range of 4.50-4.75% on the Fed funds rate, which would have an effect on mortgage rates coming down and other rate-sensitive data. Powell was less forthcoming when presented with hypothetical scenarios about what should happen if inflation remains higher deeper into the year. “We’re committed to getting to a 2% inflation rate over time,” became his answer to a few questions posed during the press conference.

In the FOMC statement, the Fed did remove one rate cut in its dot-plot for 2025, bringing that total down from four to three downward moves. For 2026, the Fed still sees four cuts. Overall, the year-end interest rate levels from Fed participants is now +4.6% for 2024, +3.9% in 2025 and +3.1% in 2026. You’ll note that none of these figures carry a “two-handle.” This suggests the fight against inflation is expected to continue over the medium-term, at least as of current data today.

Another reason the markets may have treated this news so kindly is that the Fed intends to slow the rate of runoff on its balance sheet going forward. You’ll recall that as recently as mid-2022, the U.S. balance was nearly $9 trillion, largely as a result of Treasury bonds and mortgage-backed securities being bought back during the pandemic to help keep the economy fluid. Since June of that year, the Fed began aggressively letting these assets fall off the balance sheet, to the tune of -$1.5 trillion today. A slower pace of runoff from here, in Powell’s words, will help smooth the economic transition as interest rates come down.

Finally, Powell also gave little to no expression of concern to the labor market, citing weekly jobless claims numbers coming down in recent months, and jobs totals remaining fairly healthy on monthly employment reports. Wage increases had been strong, Powell said, “but are gradually coming down to sustainable levels.” While allowing that “unexpected things” can happen, Powell suggests the FOMC will “stay… essentially the same.” Good enough for today’s market.

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