By: Dave Chenet, CFA, CAIA
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After a “Hawkish Pause,” What’s Next for the Fed?
The Federal Open Market Committee (the Fed), as widely expected, decided this week to maintain short-term borrowing costs between 5.25%-5.5%. Despite its acquiescent pause, the Fed released its forecast for future rates which sent a message to markets that expectations for significant rate cuts in 2024 may be too optimistic. Currently, the market expects the Fed to maintain the current level of rates before beginning rate cuts in mid-2024 (with three total 0.25% cuts priced in for full-year 2024).
Throughout the year, we have expected core inflation to persist above the Federal Reserve’s 2% target for longer than what the current market expectations suggest…leading to pain for markets, especially in highly interest-rate sensitive asset classes such as technology stocks and long-term bonds. Asset prices may be beginning to reflect in this “higher for longer” scenario.
As students of economic cycles, we acknowledge that the remedy for elevated inflation might materialize through a combination of decelerating economic growth and a less robust labor market. Despite the prevailing narrative in financial media advocating for a “soft landing,” we retain a sense of caution regarding the possibility of a recession on the horizon.
In our assessment, investors who are well-prepared stand not only to endure the challenging conditions but also to uncover more appealing risk-to-reward prospects amid this evolving landscape.
What We’re Reading:
Chart of the Week:
Forward-looking economic data continues to point towards slowing GDP growth in the coming quarters.