The Federal Reserve FOMC Statement holds both parts of their policy are held steady: "In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent...In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities." What we see is the range of 19 central bankers have narrowed their range of where the economy is heading, in individual, independent forecasts.
The next thing we see is that the Federal Funds Rate, or the policy rate, will end the year at 5.1%, then fall one percent in both 2025 and 2026. However, there are central bankers who think the Federal Funds Rate could rise in 2024 and 2025, and only slightly fall in 2026, while others see them falling more quickly in 2025 and 2026. What is interesting for us is that there are bankers (or at least one banker) who forecasts policy rates needing to stay higher for longer, even though few if any bankers forecast elevated inflation or elevated unemployment. There is a disconnect here. Our best explanation of this is that central bankers have a glide path for inflation where it hits 2%, and it takes a very long time to squeeze out that last 1% of inflation, even though inflation came down significantly and quickly in 2022 and 2023. We believe higher inflation earlier this year could have caused this hesitation. The market has taken an optimistic look at risk-free, longer term interest rates that are used to set U.S. mortgage rates. The market brought down the interest rate on the 10-year U.S. Treasury Note to 4.3%. This year it ranged from 3.4 to 5.0%. Today's decline of 0.11% was significant. What does this mean for U.S. retail investors?
We think that investors in fixed income (bonds) should try to lock in short-term and long-term interest rates in bonds, notes and bills that they buy as close to 5% as they can. We don't see short-term rates rising above 5.5% in the coming weeks. We think that investors in U.S. equities can look at the message of interest rates being held higher for longer as meaning headwinds, and not tailwinds for the rest of 2024. This is a risk-off message where people take a few percentage points of their portfolio out of equities and move them into fixed income, at least until we see inflation come down further. There is no real catalyst for an immediate change in housing prices and mortgage rates, but we may see interest rates drop by 0.5% for borrowers due to market preferences for more recent inflation readings (which came out today and were good, showing lower inflation). For more information about becoming a client, please call/text/whatsapp us at 1.312.515.7333 or email us at [email protected]. Thank you for reading.
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Stock Market BLOGJeffrey CohenPresident and Investment Advisor Representative Archives
November 2024
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