Key takeaways
As anticipated, the Federal Reserve held interest rates steady at its June meeting.
The policymaking Federal Open Market Committee hasn’t changed interest rates since July 2023.
Fed officials now indicate that perhaps only one rate cut may occur yet this year.
As expected, the Federal Reserve (Fed), at its June 11-12 meeting, held the line on the short-term federal funds target rate it controls. It represents the 11th consecutive month that the fed funds rate has remained constant after the Fed last raised interest rates in July 2023. For a brief time in late 2023 and early 2024, investors anticipated a series of rate cuts this year. At its June meeting, however, members of the policymaking Federal Open Market Committee (FOMC) estimated that just one rate cut was likely to occur in 2024.
A statement issued by the FOMC after the June Fed meeting, reflected its cautious stance, stating “The economic outlook is uncertain, and the committee remains highly attentive to inflation risks.”1 This point was emphasized by Fed Chair Jerome Powell in a press conference after the Fed meeting. “We see today’s report as progress…but we don’t see ourselves having the confidence that would warrant beginning to loosen policy (lower interest rates) at this time.”2
On the same day as the latest Fed decision to hold the line on interest rates, the government reported that inflation, as measured by the Consumer Price Index (CPI), dropped to 3.3% over the previous 12 months ending in May 2024, reflecting inflation’s slow but steady decline. The Fed, however, targets a long-term 2% inflation rate. The so-called “core” inflation rate (excluding the volatile food and energy sectors) rose 3.4% over the same one-year period.3 While inflation has declined significantly from its mid-2022 peak, the pace of change stabilized since last summer.
In the meantime, there are other signs that the economy remains on a steady course. It added 272,000 jobs in May, and there remain approximately 1.2 available workers from every open job in the United States.3 As a result, says Eric Freedman, chief investment officer for U.S. Bank Wealth Management, “The environment indicates the Fed will be inclined to keep rates up higher for longer, and that rate cuts won’t happen as quickly as we’d like.”
“Despite its progress since early 2022, current inflation is still above the Fed’s target rate,” says Freedman. “But we think the Fed will have to start cutting rates before inflation drops to its 2% target.”
Investors were clearly prepared for the Fed’s June decision to leave interest rates unchanged. The S&P 500 gained close to 1% when trading ended on the same day as the Fed’s announcement, reflecting that even if there’s disappointment in the ongoing delay in rate cuts, investors are taking the Fed’s latest signals in stride.4 Likewise, in the bond market, the yield on the benchmark 10-year U.S. Treasury note declined,5 indicating there are few investor concerns about the Fed maintaining higher interest rates for longer.
“The environment indicates the Fed may keep rates up higher for longer, and that rate cuts won’t happen as quickly as we’d like,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management.
Markets soared early in the year on expectations of Fed rate cuts. However, as various Fed officials commented in recent months that rate cuts weren’t imminent, markets backtracked. Following a first quarter 2024 gain of more than 10.5%, the S&P 500 retreated more than 4% in April. Stocks more than made up for that in May, but equity markets remain choppy.4
It’s notable that the Fed’s June decision to hold the line on interest rates came one week after the European Central Bank (ECB) initiated its first rate cut. “While leaders at the Fed and the ECB communicate frequently, they clearly aren’t on the same page when it comes to current interest rate policy,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. The CME FedWatch Tool, which analyzes the probabilities of fed fund rate changes based on interest rate trader actions, indicates that the most likely scenario for the initial rate cut is not until late in the year.6 Note, however, that unexpected changes to economic data could rapidly alter this outlook.
Dating back to the financial crisis of 2008, the Fed has routinely purchased bonds to bolster market liquidity. However, starting in March 2022, the Fed started reducing its bond holdings. In June, the Fed implemented a new policy, reducing Treasury holdings by $25 billion per month. It represents a modest step toward loosening monetary policy. “In terms of the market’s response, such a move probably has less impact than a decision to start lowering the fed funds target rate,” says Haworth. The Fed’s balance sheet of asset holdings grew to just under $9 trillion in early 2022. It’s now dropped to less than $7.5 trillion.7 “It seems unlikely the Fed will drop its balance sheet back to the $4 trillion level, as it stood in 2015-16, but given the extent the economy has grown since then, a larger Fed balance sheet may be justified,” says Haworth.
Despite significant Fed monetary tightening, the U.S. economy remains resilient, and it appears that the Fed expects growth to continue. First quarter 2024 annualized Gross Domestic Product (GDP) growth came in slightly lower than expectations, at 1.3%, which isn’t necessarily a warning sign for the economy, with growth still driven by solid consumer spending.8 “The consumer is still hanging in there,” says Freedman. “However, the environment may be getting a little tougher for lower-income consumers.” Notably, FOMC members, as a group, are sticking with their previous estimate that GDP will expand 2.1% over the year.9
Be sure to consult with your financial professional and review portfolio positioning to determine if changes might be appropriate given your goals, time horizon and feelings toward risk in today’s evolving interest rate environment.
Monetary policy is controlled by a nation’s central bank, which in the United States, is the Federal Reserve (Fed). The Fed’s management of monetary policy can have a significant impact on the shape of the nation’s economy. Congress’ mandate for the Fed is to maintain price stability (manage inflation); promote maximum sustainable employment (low unemployment); and provide for moderate, long-term interest rates. Fed monetary policy influences the cost of many forms of consumer debt such as mortgages, credit cards and automobile loans.
The Fed is the nation’s central bank, and perhaps the most influential financial institution in the world. The central governing board of the Federal Reserve reports to Congress, with the chair of the Federal Reserve appointed by the President. There are also 12 regional federal reserve banks that are set up like private corporations.
The Federal Reserve’s Federal Open Market Committee (FOMC) sets a target interest rate policy for the federal funds rate. This is the rate at which commercial banks borrow and lend excess reserves to other banks on an overnight basis. The fed funds rate is raised or lowered usually to help impact underlying economic conditions. For example, in 2022, as inflation surged, the FOMC began raising interest rates to make borrowing more expensive and slow economic activity. That strategy was designed to ease pricing pressures and reduce the inflation rate. In periods when the economy is slow or in a recession, the Fed tends to lower rates to try to stimulate economic activity and help the economy expand again.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
With the Federal Reserve maintaining higher interest rates for longer to get inflation under control, what opportunities does this create for bond investors?
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