At their September Federal Open Market Committee (FOMC) meeting, the Federal Reserve left interest rates unchanged as inflation remains sticky. The Fed struck a rather hawkish tone, leaving further rate increases on the table. In addition, the FOMC raised its outlook for next year’s rates. The FOMC Dot Plot, a quarterly update that shows Federal Reserve official’s projections for short-term interest rates, increased by 50 basis points to 5.1% for the end of 2024. This increase indicates that Fed officials expect interest rates to remain higher for longer.
The higher-for-longer narrative projected by the FOMC at its September meeting caught both the equity and bond markets off guard. The bond market had already been pricing in as much as 75 basis points of interest rate cuts by the FOMC in 2024. The new Dot Plot now indicates the possibility of just one 25 basis point rate cut in 2024.
Additional headwinds on inflation could continue to force the Fed to keep rates elevated for longer. Wage negotiations by the United Auto Workers union, which initially asked for wage increases of 46% over the next four years, are certain to have an impact on inflation. Every employee and employer are keeping a close eye on these negotiations as they could potentially have a ripple effect on wages across the country.
With the uncertainty of inflation and how sticky it may be, market volatility could remain elevated. It is our impression that a good amount of the recent equity market weakness has been related to the sentiment that perhaps the Fed is not done raising rates yet, which is a reversal from sentiments in the first half of the year. Bond yields are the highest they have been in over 15 years and now provide a more attractive return for investors. This creates competition between fixed income and equities for capital though, in the long run, we believe equities along with alternatives remain the superior assets to combat inflation’s corrosive impact on a portfolio.
In summary, whether it is the path of the economy, inflation, interest rates, earnings, investor sentiment, geopolitics or any of the other inputs that drive the direction of capital markets, there are no straight lines and therefore there are no straight lines when it comes to generating returns. It is only with the benefit of time and a well-constructed portfolio that takes advantage of multiple return streams that the “issues of today” give way to a smoother perspective of capital market returns and the discipline it takes to achieve them.
Please reach out to your Ancora team if you have any questions, comments or concerns that we can address.