FED Sticks to Three Rate Cuts this Year

FED Three Rate Cut Plan is on Track for 2024

Federal Reserve officials indicated that they still expect to cut interest rates by three-quarters of a percentage point this year, leading to record highs in US equity markets. The market reacted positively to the Federal Open Market Committee’s decision to leave rates unchanged at 5.25% and 5.5%. The central bank also raised its forecast for US economic growth, foreseeing slightly higher inflation than expected.

The decision to keep rates steady reflects the Fed’s confidence in the current state of the economy. Inflation has been a key concern for the central bank, and the slightly higher forecast suggests that they are closely monitoring price pressures. The positive market reaction indicates that investors are optimistic about the Fed’s stance and its impact on economic growth.

Key Points:

• Federal Reserve officials plan to cut interest rates by three-quarters of a percentage point this year.
• The Federal Open Market Committee voted unanimously to leave rates unchanged at 5.25% and 5.5%.
• The Fed raised its forecast for US economic growth and expects slightly higher inflation.
• The market responded positively to the news, with US equity markets reaching record highs.
• Fed Chair Jay Powell indicated that the economy is performing well, with GDP expected to expand by 2.1% this year.

Our Take

The decision to keep rates steady reflects the Fed’s confidence in the current state of the economy. Inflation has been a key concern for the central bank, and the slightly higher forecast suggests that they are closely monitoring price pressures. This has shown up in the rally of gold on inflation concerns and central banks easing rates.

In other words, we are seeing the start of central banks abandoning a point inflation target. For the Federal Reserve this was 2%, now they are saying to the market that maybe a range somewhere in the 2 to 3% range is fine.

Thus, the positive market reaction indicates that investors are optimistic about the Fed’s stance and its impact on economic growth. This spurred a further increase in the stock market particularly around the tech stock focusing on the AI theme. The question is are we in a bubble, that is debatable. The common view is that this stock market is based on fundamentals unlike during the dot-com bubble of 1999. The question is can the stocks deliver on the investment hype?

This is a momentum trade thus and markets can decouple from the economy, thus we expect the rally to continue. This will be especially true during an election year. However, there is still event risk that could quickly move the market down