The Federal Reserve met for the final time in 2023 and left the overnight lending rate unchanged at 5.25-5.50%. However, the Fed became more dovish on its expectations for rate cuts in 2024 and 2025. The FOMC now sees 75 basis points of rate cuts in 2024, up from the 25 basis points previously estimated. For 2025, the Federal Open Market Committee (FOMC) now predicts an additional 75 basis points of rates cuts, up from 50 basis points previously. While the FOMC acknowledged that inflation remains elevated, the Committee believes that it will continue to decelerate in 2024. The Committee reduced its Personal Consumption Expenditure deflator (inflation) forecast to 2.4% in 2024 from a previously estimated 2.6%. Combined, the increase in rate cut expectations and decrease in inflation expectations set a positive tone for the markets.
Interest rates plummeted on the heels of the FOMC revision with the 10-year Treasury note yield falling to 3.94% from 4.20% and the 2-year note yield dropping 37 basis points to 4.36%. The decline in rates also set off a rally in risk assets with equities rising roughly 1.5%. If the decline in interest rates is sustainable, it could lead to further economic strength as mortgage rates will likely decline to well below 7% from a recent peak of 8% just a few weeks ago (30-year fixed rate). The consumer traditionally feels more at ease with lower interest rates, thereby spending more.
The overall dovish comments by the FOMC are a welcome surprise, but the volatility in interest rates is likely to continue. Economic data continues to remain solid as witnessed by the 0.3% month-over-moth increase in retail sales for November (expectations were for a decline of -0.1%) and an unemployment rate of 3.7%. The FOMC still has its work cut out for them to tame inflation and is trying to thread the needle with a soft landing for the economy. While it is certainly possible that the Fed can achieve this soft landing, it will be extremely difficult and require a lot of things to go their way. In the mean-time, being patient and prudent with capital allocation and not chasing the market will help achieve long-term success in portfolios.
Below is the recent ‘Dot Plot’ released by the FOMC on December 13th. The yellow dots on the graph depict the interest rate expectations for each individual voting member of the FOMC. The green line represents the FOMC’s median rate expectation while the white line is what the market is currently pricing in for future rate expectations.
As always, please reach out to your Ancora team if you have any questions, comments or concerns that we can address.