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February 7th, 2024

Fed Changes Mind On Rate Cuts—What Does That Mean For Investors?

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Darren B. from Tigard, OR asks: Hey Mitch, I’m not feeling so great about interest rate cuts in 2024. With the jobs report from last week and given the Fed’s comments from a recent meeting, it seems like March cuts are off the table. Isn’t a big part of the bull case in 2024 because of rate cuts? What if they don’t come? Thank you.

Mitch’s Response:

Thank you for sending your question, Darren. I think you’re right to bring attention to the potential risk of fewer-than-expected interest rate cuts. But I would frame this risk a bit differently – not as a potential death knell for the bull market, but as a potential avenue for short-term equity market volatility and possibly a correction in 2024.1

In other words, the economy and equity markets don’t need a certain amount of rate cuts to perform well in 2024, in my view. However, disappointment about the trajectory of interest rates could certainly cause some short-term turbulence, and I would not be surprised if that’s what we saw this year.

As you point out in your question, fundamentals continue to suggest that the economy is managing the higher interest rate regime just fine. The Labor Department reported last week that the U.S. economy added 353,000 jobs in January, which was about double what economists had forecasted and marked the best month of jobs growth in a year.

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Nonfarm payroll gains (change, thousands of persons)

Source: Federal Reserve Bank of St. Louis3

In the Federal Reserve’s first policy meeting held last week, the central bank reiterated that it was thinking about when to cut rates – but also signaled a cut was by no means imminent. In Chairman Jerome Powell’s words, “I don’t think it’s likely that the committee will reach a level of confidence [to cut rates] by the time of the March meeting.”

To place even more emphasis on the low likelihood of an interest rate cut in March, Chairman Powell gave a February 4 interview on “60 Minutes” where he struck a tone of caution about starting the process of reducing interest rates. Powell repeated the view that the Fed does not need to wait until inflation falls to 2%, but he also hedged by saying the central bank is still looking for signs that inflation’s decline is “sustainable.”

The market response was fairly swift, with traders scaling back their bets not only for March rate cuts but also for May rate cuts. I would argue the market has been far too optimistic about the size and frequency of rate cuts for a long time, so I would expect some corrective action as expectations more closely align with reality.

But my bottom line when it comes to interest rate policy in 2024 is that if rates stay high because the economy is strong – and not because inflation is increasingly stubborn – then the bull case should remain intact. In other words, it’s a year where I think economic and earnings growth matter more than whether the market gets what it wants in terms of Fed policy.

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Disclosure

1 Wall Street Journal. February 4, 2024. https://www.wsj.com/economy/central-banking/powell-says-fed-has-new-focus-when-to-cut-rates-dbc3f6af?mod=economy_lead_pos3

2 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.

3 Fred Economic Data. February 2, 2024. https://fred.stlouisfed.org/series/PAYEMS#

4 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.


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